Question
Local Engineers Ltd produces the same power generators in two plants: a new plant in Victoria and an older plant in New South Wales. The
Local Engineers Ltd produces the same power generators in two plants: a new plant in Victoria and an older plant in New South Wales. The following data are available for the two plants:
Particulars | Victoria | New South Wales | ||
Selling price | $150.00 | $150.00 | ||
Variable manufacturing cost per unit | 72.00 | 88.00 | ||
Fixed manufacturing cost per unit | 30.00 | 15.00 | ||
Variable marketing and distribution cost per unit | 14.00 | 14.00 | ||
Fixed marketing and distribution cost per unit | 19.00 | 14.50 | ||
Total cost per unit | 135.00 | 131.50 | ||
Operating profit per unit | 15.00 | 18.50 | ||
Other relevant information | ||||
Production rate per day | 400 units | 320 units | ||
Normal annual capacity usage | 240 days | 240 days | ||
Maximum annual capacity | 300 days | 300 days |
All fixed costs per unit are calculated based on a normal capacity usage consisting of 240 working days. When the number of working days exceeds 240, overtime charges raise the variable manufacturing costs of additional units by $3.00 per unit in Victoria and $8.00 per unit in New South Wales.
Local Engineers Ltd is expected to produce and sell 192,000 power generators during the coming year. Wanting to take advantage of the higher profit per unit in New South Wales, the company’s production manager has decided to manufacture 96,000 units at each plant,
resulting in a plan in which New South Wales operates at capacity (320 units per day x 300 days) and Victoria operates at its normal volume (400 units per day x 240 days).
Required:
(a) Calculate the break-even point in units for the Victorian plant and for the New South Wales plant.
(b) Calculate the profit that would result from the production manager’s plan to produce 96,000 units at each plant.
(c) Determine how the production of 192,000 units should be allocated between the Victorian and New South Wales plants to maximise profit for Local Engineers Ltd. Show your calculations.
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