Question Three Three products - A, B and C are made and sold by a company Information on the products is given below. Product A Product B Product C Selling price 120 180 200 Direct materials 52 100 105 Direct labour: Hours Hours Hours Rate per hour () 12 3 9,000 4 7,500 5 8,000 Demand (units) Total fixed overhead for the year was budgeted at 700,000. Unfortunately not all the demand for the products can be met as each of the products require highly skilled labour and there is only 80,000 hours of skilled labour available. Required: a) Show, in the form of a statement for management, the unit costs of each of the three products and the total profit expected for the current year based on being able to satisfy all the demand for the three products. (4 marks) b) Calculate the profit if the most profitable mixture of the products was made and sold, due to limitation on skilled labour. (6 marks) c) Identify and comment on any possible problems which may arise if the mixture in b) above were to be produced. (3 marks) d) The company is looking at the possibility of producing a slightly different model of the C, the C2, in place of the C. A feasibility study at a cost of 10,000 has already been carried out which has concluded that existing customers of the C would take the C2 as an alternative, so demand for the C2 will be the same as the demand for the C. However the C2 only requires 4 direct labour hours per unit. However, the machinery used to produce the C will have to be modified in order to produce the C2. This machine cost 100,000 two years ago and is expected to have a useful life of ten years. It will cost 35,000 to modify the machine. In order to keep demand at the high level, the C2 will sell for the slightly reduced price of 190 but will have the same direct material cost. e) Calculate the effect on profit of producing the C2 rather than the C and recommend whether this course of action should be taken. (8 marks) f) Discuss different types of costs and whether they may or may not be relevant to decisions. (4 marks)