Question 3

Global Tyres Limited manufactures three types of tyres; Premium, Standard and Budget brands. The maximum market demand and resource requirements of each of these products are shown below:

The tyres are made from an advanced slip-resistant material that gives the firm a competitive advantage. Global Tyres has established an export requirement in country B that will result in massive growth. However, an email from the purchasing manager has informed you that the supplier expects that the years supply of this special material is limited to 251,000 mitres.

Global Tyres Limited does not keep any inventory. Without the board of directors sanction, the sales director has already accepted an order for 1,000 Standard Tyres that, if not fulfilled, would incur a financial penalty of 30,000. This order is included in the Standard Tyres maximum market demand figure.

Global Tyres Limiteds directors need to know whether they should first satisfy the contract and then prioritise production in the normal way or whether it should consider breaching the contract and incurring the penalty.

Budgeted data for the 2022 year

	Premium	Standard	Budget
Maximum demand	2,000	1,500	1,000
Heat resistant material per unit	90	70	10

Actual results for 2020

	Premium	Standard	Budget	Total
Sales (units)	400	939	600	1,939
Sales revenue ()	300,000	315,000	280,000	895,000
Raw materials ()	80,000	110,000	130,000	320,000
Direct labour ()	30,000	45,000	50,000	125,000
Overheads ()	60,000	80,000	60,000	200,000
Total Costs	170,000	235,000	240,000	645,000
Profit / (Loss) ()	130,000	80,000	40,000	250,000

Actual results for 2021

	Premium	Standard	Budget	Total
Sales (units)	800	1,201	1,100	3,101
Sales revenue ()	330,000	252,000	210,000	792,000
Raw materials ()	90,000	80,000	90,000	260,000
Direct labour ()	40,000	34,000	39,500	113,500
Overheads ()	85,000	92,500	78,000	255,500
Total Costs	215,000	206,500	207,500	629,000
Profit / (Loss) ()	115,000	45,500	2,500	163,000

Required:

1. Prepare the following workings, analysed by product, based on the above information:
   1. Calculate fixed and variable overheads using the high/low method. (4 marks)
   2. Marginal cost card showing selling price, variable costs, and contribution per unit for each product. (4 marks)
   3. Contribution per unit of scarce resource and your decision for ranking the product to be produced first based on the highest contribution. (4 marks)

2. Prepare a budgeted production schedule and a marginal cost income statement (analysed by product) for the year 2022 assuming that the Standard Tyres contract is honoured. (8 marks)

3. Prepare budgeted production schedule and a marginal cost income statement (analysed by product) for the year 2022 assuming that the Standard Tyres contract is not honoured. (8 marks)

4. Advise Global Tyres Limiteds directors if they should honour or not honour the Standard Tyres contract. (2 marks)

Question3 Total 30 marks