Smug Ltd produces and sells two versions of fruit juicers: Deluxe and Premium. The juicers

produced by Smug Ltd use a patented technology to extract maximum possible juice from

most fruits. The 'Premium' version can handle larger fruit and has more processing options

relative to the 'Deluxe' version. The following table provides the financial results of the most

recent year of operations:

Particulars

Deluxe

Premium

Total

Units sold

90,000

10,000

100,000

Revenue ($)

6,300,000

900,000

7,200,000

Direct material cost ($)

1,080,000

250,000

1,330,000

Direct labour cost ($)

1,440,000

160,000

1,600,000

Contribution ($)

3,780,000

490,000

4,270,000

Allocation fixed manufacturing overheads ($)

3,420,360

380,040

3,800,400

Allocated fixed selling and after sales support

costs ($)

251,563

35,937

287,500

Operating profit ($)

108,077

74,023

182,100

Profit margin per unit ($)

$1.20

$7.40

Labour cost is $16 per hour and each product requires one (1) hour of labour time. The

company currently allocates all fixed manufacturing overheads using labour hours as the

allocation basis. The company currently allocates fixed selling and after sales support costs

using revenue as the allocation basis.

Although the profit margin per unit of Deluxe version is rather low, Smug Ltd believes that it is

strategically important to keep this model in the product mix keeping in mind its future export

potential at a higher selling price. However, Smug Ltd can tailor its promotion and sales

strategies to improve the sales mix to 8:2 from the current 9:1 ratio of 'Deluxe' to 'Premium"

juicers, with total volume staying at 100,000 units.

The notes to accounts indicate that of the total fixed manufacturing overheads, $1,100,400

relate to batch related activities such as scheduling production runs and the rest of the fixed

manufacturing overheads relate to unit level activities. $114,600 is the amount of admin

overheads out of the total selling and admin overheads.

It is also noted that the 'Premium' juicer is produced in smaller batches (250 units per batch)

than that of 'Deluxe' juicer (500 units per batch). Similarly, it takes 10 sales visits to sell 1,000

units of the 'Deluxe' juicer, while it takes 25 visits to sell 1,000 units of 'Premium' juicer.

Required

(a) Prepare a profitability statement based on the proposed sales mix, using the current

method of allocating overheads.

(b) Prepare a profitability statement based on the proposed sales mix, using a more

appropriate basis of allocating overheads.

(c) Advise the management of Smug Ltd on whether it should go ahead with the proposed

change in sales mix.