Mobilo Ltd produce and sell three types of mobile phones, MB1, MB2 and MB3.

The following annual forecast of expected costs and revenues per mobile phone has just been produced.

	MB1	MB2	MB3
Demand (units)	12,000	10,000	5,000
Selling price	50	80	120
Less Costs:
Components	10	15	25
Direct Labour	12	18	30
Allocated fixed costs	20	30	50
	8	17	15

Required:

1. Produce a marginal costing statement showing the contribution made by each product and total net profit overall. (5 marks)
2. The direct labour is paid 12 per hour and can work on any of the mobile phones. However, due to the particular skills required, the company is only able to recruit sufficient staff to provide 30,000 direct labour hours in total next year.

Calculate the optimum production to maximise profits given the demand forecast and the labour shortage. Calculate the revised net profit. (7 marks)

3. As the availability of skilled labour to produce the three products is limited, Mobilo is trying to decide whether to add a further model, the MB4 to its product range, which does not require the skilled labour. There is availability of labour to work on the MB4. A feasibility study has already been carried out at a cost of 8,000 and estimated demand for the MB4 is 10,000 phones.

There is a machine which is currently not being used which can be modified to produce the MB4. This machine cost 200,000 and once the machine is in use, depreciation of 40,000 per year will be charged on the machine. It will cost 50,000 to modify the machine. The MB4 is expected to sell for 90 per phone. The cost of components for each phone is 30. The unskilled labour will be paid 8 per hour and each phone will take 4 hours to produce.

Allocated overhead for each MB4 will be at the rate of 20 per direct labour hour.

However the marketing department believes that the sales of the MB3 will be affected if the MB4 is sold so Mobilo will drop the MB3 from its product range if it decides to produce the MB4. The skilled labour that would have worked on the MB3 will be let go.

Calculate the net relevant cost or benefit of adding the model MB4 to its product range in place of the model MB3. (8 marks)

4. Explain clearly your reasons for including or excluding each cost within your analysis for section c. (5 marks)