Toptaste Ltd produces and sells its standard wine by blending a secret formula of fruits with alcohol. The fruits are sourced from reputable orchards across Europe. The selection criteria of fruit orchards include quality, price and sustainability. The standard wine is highly branded and successfully sold at a price of 40.00 per litre.

Toptaste Ltd is considering producing a new blend of wine by adding a combination of herbs that is claimed to be beneficial for health. The combination of herbs to be added will be different for the male and female blend as the two sexes have physiological differences. There is initial evidence that the combinations of herbs will bring about health benefits but this evidence is not conclusive and the possibility of side effects lack clarity. However, market research suggests that a premium could be charged for the new blends of wine that can promise health benefits.

The market research had cost 5,000.

Toptaste Ltd is contemplating the further processing of a part of the companys output to incorporate the combinations of herbs. Data has been prepared for the costs and revenues expected for the following month (a test month) assuming that a part of the companys output will be further processed.

The output selected for further processing is 10,000 litres, about a tenth of the companys normal monthly output. Of this, 10% is made up of alcohol which costs 20 per litre. The rest is a blend of fruits costing 9 per litre. The direct labour required to produce 10,000 litres of standard wine before any further processing is 10,000 hours at a cost of 12 per hour.

Of the output selected for further processing, 4,000 litres (40%) will be for the production of the male blend and 200 litres of herbs costing 200 per litre will then be added. The herbs required for the male blend have yet to be purchased. The remaining 6,000 litres (60%) will be for the production of the female blend and 600 litres of herbs will be added. 800 litres of herbs required for the production of the female blend have been purchased three weeks ago and it had cost the company 380 per litre. The herbs needed for the production of the female blend is used for the companys other product lines. The current purchase price of the herbs for the female blend is 400 per litre and the resale price is 300 per litre. In both cases of further processing for the male and female blend, the adding of the herbs adds to the overall volume of the product as there is no resulting processing loss.

Toptaste Ltd has sufficient existing machinery to carry out the test processing. The required machinery was bought a year ago at a price of 150,000. It has a useful life of 15 years and has no scrap value.

The new process will be supervised by one of the more experienced supervisors currently employed by Toptaste Ltd on a permanent contract. Her current annual salary is 48,000 and it is expected that she will spend 15% of her time working on the herbs adding process during the test month. She currently has the capacity to oversee the herbs adding process without compromising her other work commitments. Her time on the process will be split evenly between the male and female blends of the product.

Additional direct labour will be required to further process the wine, with an extra 3,900 hours for the male blend and 6,500 extra hours for the female blend of the herbs-added wine. All direct labour is currently fully employed, producing the standard wine. New labour with the required skills will not be available at short notice.

Toptaste Ltd allocates fixed overhead at the rate of 20 per direct labour hour to all products for the purposes of reporting profits.

The selling prices that could be achieved as a one-off monthly promotion are:

• Male blend: 80.00 per litre

• Female blend: 95.00 per litre

  Required:

1. a) Outline the financial and other factors that Toptaste Ltd should consider when making the further processing decision. (Note: No calculations are required.)

   (5 marks)

2. b) Using relevant costing, evaluate whether Toptaste Ltd should experiment with the herbs adding process. Provide a separate assessment and conclusion for the male and the female blend of the product. You need to clearly explain the rationale of your computations.

   (25 marks)

3. c) Toptaste Ltd is considering outsourcing the production of the standard wine. Outline the main factors it should consider before making such a decision.

   (5 marks)