its costing system, the company arbitrarily allocates these indirect fixed labour costs using an hourly rate of $15 per hour. Fixed overhead costs are also allocated.

The meals are produced in batches of 100 units.

Costs and selling prices for the three meals are as follows:

	Cost per kg	Revenue and Cost Information Per batch of 100 meals
Meal		Chef A	Chef B	Chef C
Sales Price (per batch of 100 meals)		$550	$320	$475
Ingredient K cost	$5.00 per kg	$10	$25	$20
Ingredient L cost	$10.00 per kg	$80	$20	$100
Ingredient M cost	$15.00 per kg	$180	$30	$45
Fixed Labour cost (Allocated @ $15 per hour)		$45	$60	$90
Fixed overhead costs (Allocated)		$20	$80	$40

QP Inc. is preparing its production plan for the next quarter and has estimated the maximum demand from its customers to be as follows:

Chef A	500 batches
Chef B	400 batches
Chef C	350 batches

These figures are lower than previous periods because a regular customer has delayed a large order, and as a result the company now has excess capacity for the next quarter.

Included in the above maximum demand figures is an order from an important customer who wants 240 batches of each product each quarter. If QP Inc. does not fill this order, the company will be required to pay a significant financial penalty. Therefore, QP management requires that this customers order must be fulfilled. Management expects to produce enough batches to satisfy the maximum demand next quarter.

Part 1

1. Calculate the contribution margin expected based on next quarters production. As noted, assume that there are no constraints on demand and that QP has sufficient capacity to meet maximum demand. (6 marks)

2. Calculate the amounts of Ingredients K, L and M that will be required for the next quarters production (in kg). (3 marks)

Part 2

After determining the requirements in Part 1 the Production Manager has just been told that in the next quarter two (2) of the ingredients used are expected to be in short supply. Unfortunately, the company does not have these ingredients in inventory.

There are no supply problems for Ingredient K but supplies of Ingredient L and M for the next quarter are expected to be limited to:

Ingredient L	7,000 kg
Ingredient M	6,500 kg

Based on some research, the Production Manager has concluded that the impact of the problem can be minimized by using Ingredient V as a direct substitute for Ingredient M. Ingredient V costs the same as Ingredient M and there are no supply problems with this ingredient.

Required:

1. Based on this new information, determine the number of batches of each of the three meals (Chef A, Chef B and Chef C) the company should produce during the next quarter in order to maximize profits. Show detailed calculations supporting your determination. Demand is not expected to change from last quarter, but you must meet the needs of the important customer first.