Question 1

ABC Ltd produces Two products X and Y. The original budgeted details for a

forthcoming period are as follows.

X Y

Sales units 1,000 1,100

Sales $ 50,000 66,000

Direct material $ 8,000 13,200

Direct labour $ 20,000 24,750

Variable overhead $ 8,000 10,560

Fixed overhead $ 6,000 9,000

Direct labour is paid at a rate of $5 per hour.

After consideration of the above, the board of directors have now made the following

changes:

Because of a skill shortage, direct labour will be limited to 6,450 hours in the period;

and, with an advertising campaign costing $4,000 for the period, sales of each

product can be increased by 20%.

Required:

(a) Explain what is meant by a limiting factor of production. (3 marks)

(b) Calculate the profit for the original budget. (7 marks)

(c) Calculate the revised profit (after the directors' changes) with direct labour as the

limiting factor of production, if the advertising campaign goes ahead, resulting in

the predicted increase in sales. (Work to the nearest $.) (12 marks)

(d) Calculate the increase in profit in (c) that would arise if an extra 500 direct labour

hours became availabl