Sunny Dezigns DAC produces gifts for the tourism industry and has been operating in Ireland for ten years. By

analysing its financial results over time to maximise profits the company has focused production on three main

items, keyrings, drinks coasters and fridge magnets. As a consequence of the improvement in the economy, Sunny

Dezigns DAC has recently received orders from new customers. While delighted with the orders, the production

director is concerned about the company's capacity to produce the items required. Details extracted from the

company's budgeted management accounts and other relevant information are shown below:

1. Product information (per unit):

Keyrings Coasters Fridge magnets

Selling price 1.40 2.65 1.20

Materials 0.50 0.75 0.40

Labour 0.30 0.45 0.15

2. Total budgeted production overheads for the year are expected to be 211,250.Twenty percent (20%) of all

production overheads are variable and are allocated to products on the basis of labour hours. Fixed

production overheads are considered to be period costs.

3. Budgeted annual demand for the three products, including the new orders received is as follows;

Keyrings 132,500 units

Coasters 60,400 units

Fridge magnets 100,000 units

4. The company has budgeted to pay its workers a fixed rate of 12 per hour and has included 6,500 labour

hours for the year in its budget.

REQUIREMENT:

(a) Prepare calculations to show whether Sunny Dezigns DAC will have sufficient production capacity to meet budgeted

demand for its products.

(6 marks)

(b) Compute the optimal production plan for Sunny Dezigns DAC and show the annual profit expected. (15 marks)

(c) Briefly explain the following terms, providing examples to illustrate your answer:

(i) Sunk cost.

(ii) Opportunity cost. (4 marks