Question Two

The accountant of Brown Plc has just produced the following Income Statement based on total (absorption) costing principles:

	Product A	Product B	Product C	Total
Units	4,000	3,000	4,000
Labour hours	16,000	24,000	20,000
	000s	000s	000s	000s
Sales Revenue	400	810	500	1,710
Less:
Raw Materials	100	270	120	490
Production Wages	160	240	200	600
Production overheads (fixed)	60	60	60	180
Gross Profit	80	240	120	440
Selling Overheads:
Variable	80	90	20	190
Fixed	40	40	40	120
Net Profit	(40)	110	60	130

Required:

1. Produce a marginal costing statement showing the contribution made by each of the existing products. (5 marks)

2. Using the information, you have prepared, discuss whether product A should be discontinued. (3 marks)

3. The company is facing a shortage in the supply of labour and only expects 50,000 labour hours to be available. Using the information, you prepared in part a), calculate how many units of products A, B, and C should be produced to ensure the most profitable sales mix and calculate the new net profit. (9 marks)

4. The extra labour hours could be provided by a recruitment agency but for an extra 3 per hour. Calculate the effect on net profit if the extra labour could be recruited. (3 marks)

5. Discuss the different relevant costs that need to be taken into account when taking on a special order. How would these costs be different when there is spare capacity and when there is no spare capacity? (5 marks)