Question
J Co manufactures three products M, N and P that use the same machines. The budgeted income statements for the three products are as follows:
J Co manufactures three products M, N and P that use the same machines. The budgeted income statements for the three products are as follows: M N P TAS per unit TAS per unit TAS per unit Sales price 2,000 1,500 2,500 Prime costs (1,000) (750) (1,750) Variable overheads (500) (250) (250) Fixed overheads (400) (420) (520) Profit/(loss) 100 80 (20) Annual sales demand (units) 50,000 75,000 25,000 Machine hours per unit 20 25 16 After the budget had been formulated, an unforeseen condition has meant that during the next period the available machine capacity has been limited to 2,965,000 hours. The Marketing manager of J Co has also disclosed that a one off contract had been agreed with a major customer to supply 70,000 units of product N during the next period at the current price. These units are included in the annual sales demand budget. Required: (a) Determine the profit maximization production mix and the total maximum contribution that could be earned next period ignoring the contract with the major customer. (b) Calculate the maximum financial penalty that J Co would be willing to pay to cancel the contract with the major customer. (c) Calculate the breakeven point sales units and margin of safety percentage for each product and comment on your findings. (d) Comment on other factors that J Co should consider before cancelling the major customer's contract.
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