Halbert plc manufactures and sells three products that use the same production facilities. In the plan for 2011, the details of each product were:-

Product K L M

Selling price per unit 70 45 30

Variable costs per unit 35 25 12

Apportioned fixed costs per unit 20 10 10

Profit per unit 15 10 8

Estimated sales units 15 000 20 000 20 000

Estimated profit - 000 225 200 160

When the budget was prepared, the total fixed costs were estimated to be 700 000 and the output was expected to be 140 000 direct labour hours. An overhead recovery rate of 5 per direct labour hour was used to apportion the fixed costs to products. As a result of unforeseen circumstances, the capacity has been reduced to only 105 000 direct labour hours in 2011 but the total overhead costs will remain at a total of 700 000.

Required

1. What products should be produced and sold to maximise the companys profit now that the production hours have been reduced and what will be the total profit of the company?

2. As an alternative to turning away orders, it has been suggested that the selling price of all three products should be increased by 10 per cent. It is expected that this will reduce the demand for each product by 25 per cent. This would reduce the required direct labour to the 105 000 hours that are now available. Would this result in a better outcome than that the one resulting from the strategy proposed in part (a)?