Question 1 Airways Ltd is preparing its annual budget to the year end 31 December. It produces and sells one product at a selling price of 125. It is estimated that the selling price will increase to 130 from 1 July and it is budgeted that the sales levels, in units, for each quarter will be as follows: Quarter 1 35,000 Quarter 2 45,000 Quarter 3 25,000 Quarter 4 42,000 Sales for the first quarter of the following year will be 50,000 units. Each unit requires raw materials X, Y and Z and the quantities required for one unit of the finished product and the associated cost per unit are: Raw material: Quantity to make one unit of finished Raw material cost: goods: X Y Z 5 kgs 2 kgs 1.5 kgs 7 per kg 4 per kg 25 per kg The cost of raw materials X and Y are expected to increase by 10% with effect from 1 April and Z by 2% from 1 October. Each unit of finished goods requires 3 hours of labour and the labour cost per hour is 12. This will increase by 10% per hour on 1 October Variable overheads are E8 per unit of finished goods Fixed overheads are budgeted at 303 325 for the year and are absorbed based on the total number of budgeted production units Opening inventories of finished goods are 8,000 units and closing inventories of finished goods are expected to be 15% of the next quarter's sales The company operates a just-in-time approach in relation to raw materials and no opening on closing raw materials are heid Continued on the next page