Question 2 (10 marks) Piko Company manufactures a range of products that are sold to various wholesale outlets. The company's production department A manufactures three products (W, X, Y). These products require a specific drilling machine in their production process. Selling prices and production costs for these three products are as follows: Product Selling price per unit Direct materials per unit Direct labour per unit Variable manufacturing overheads per unit Fixed manufacturing overheads absorbed per unit Variable selling and administration overhead per unit W($) 365 80.5 60.5 24 64.5 21.5 X ($) 390 95 61 24.5 86 21.5 Y($) 225 45.5 40 20.5 43 21.5 Additional information: (i) Total budgeted fixed manufacturing overheads for production department A is $430,000 per year. Fixed manufacturing overheads are absorbed on the basis of drilling machine hours. The maximum of 20,000 drilling machine hours are available each year. (ii) The sales forecast for the following year is: Product Sales W 3,900 units X 1,500 units Y 4,300 units Required: (a) Determine the production plan which will maximize the contribution for these three products and prepare a statement showing the total contribution that the plan will yield. (4 marks) Two alternative strategies are being considered to overcome the production shortfall: (1) To increase the number of hours worked using the existing drilling machinery by working overtime. Direct labour would be paid at a premium of 50% above normal labour rates and other variable costs would be expected to remain unchanged per unit of output. (2) To hire an additional drilling machine for $10,000 per month in order to increase the production level. (b) Evaluate each of the two alternative strategies and advise which alternative should be adopted. (3 marks) (c) When production capacity is limited and it is possible to obtain additional customer orders, a firm must consider its opportunity costs to evaluate the profitability of these new orders.' Do you agree with this statement? If so, what are the opportunity costs in this context? (3 marks) [Total for Question 2: 10 marks) End of the paper 2