- 15 Marks
Question
Jumbo Tailors Nigeria Limited manufactures three unique wears for which the maximum revenue for the coming year is estimated as follows:
| N | |
|---|---|
| Trousers | 8,250,000 |
| Jackets | 9,880,000 |
| Skirts | 12,390,000 |
Summarised unit cost data are as follows:
| Product | Trousers | Jackets | Skirts |
|---|---|---|---|
| N | N | N | |
| Direct material | 1,000 | 900 | 700 |
| Direct Labour | 500 | 450 | 350 |
| Variable costs | 800 | 1,600 | 1,000 |
| Fixed costs | 250 | 500 | 400 |
| Total costs | 2,550 | 3,450 | 2,450 |
The allocation of fixed costs was derived from last year‟s production level and this may be reviewed, if current output plans are different.
Estimated selling prices are:
| Product | Price |
|---|---|
| N | |
| Trousers | 3,300 |
| Jackets | 3,800 |
| Skirts | 2,950 |
The products are processed on sewing machines housed in a building of three blocks.
Block A contains type I machine which has an estimated maximum machine hour capacity of 39,200 hours available in the forthcoming year with fixed overhead cost of N1,960,000 per annum.
Block B contains type II machine of which 20,000 machine hours are estimated in the forthcoming year with a fixed overhead cost of N1,500,000 per annum.
Block C also contains type II machine which also has an estimate of 16,000 machine hours available in the forthcoming year. The fixed overhead cost of N740,000 is estimated per annum for Block C.
The required machine hours for one unit of output for each Jeans on each type of machine are as follows:
| Product | Trousers | Jackets | Skirts |
|---|---|---|---|
| Type I machine | 2 hours | 4 hours | 6 hours |
| Type II machine | 3 hours | 6 hours | 2 hours |
You are required to:
a. Determine the optimal production plan which Jumbo Tailors Nigeria Limited should adopt. (12 Marks)
b. Calculate the total profit that would be made, if the production plan in (a) above is adopted. (3 Marks)
Answer
a. Optimal Production Plan (Optimum Quantity) for Jumbo tailor Computation of machine utilisation hours:
Machine hours required:
| Products | Workings | Machine 1 Hours | Machine 2 Hours |
|---|---|---|---|
| Trousers | Machine 1 = 2 x 2500 | 5,000 | |
| Machine 2 = 3 x 2500 | 7,500 | ||
| Jackets | Machine 1 = 4 x 2600 | 10,400 | |
| Machine 2 = 6 x 2600 | 15,600 | ||
| Skirts | Machine 1= 6 x 4200 | 25,200 | |
| Machine 2= 2 x 4200 | 8400 | ||
| Total machine hours required | 40600 | 31500 | |
| Total Machine hours available | 39200 | 36000 | |
| Deficit /Surplus | (1400) | 4500 |
From the above analysis, Machine 1 is the Limiting factor.
Quantity Produced and Sold:
Trouser = Sales /Selling Price = ₦8,250,000/₦3300 = 2,500 units
Jackets = Sales /Selling Price = ₦9,880,000/ ₦3800 = 2,600 units
Skirts = Sales / Selling Price = ₦12,390,000 / ₦2950 = 4200 units
Contribution analysis and ranking
| Particulars | Trousers ₦ | Jackets ₦ | Skirts ₦ |
|---|---|---|---|
| Selling Price | 3300 | 3800 | 2950 |
| Variable costs: | |||
| Direct Material | 1000 | 900 | 700 |
| Direct Labour | 500 | 450 | 350 |
| Variable overhead | 800 | 1600 | 1000 |
| 2300 | 2950 | 2050 | |
| Contribution per unit | 1000 | 850 | 900 |
| Machine 1 hours | 2 | 4 | 6 |
| Contribution / machine 1 hours | ₦500 | ₦212.50 | ₦150 |
| Ranking | 1st | 2nd | 3rd |
Determination of production plan
Trouser = 5000 hours = 2500 units
Jacket = 10400 hours = 2600 units
Skirts (Balance) = 23800 hours = 23800/6 = 3967 units
Total Available 39200 hours
b. Total profit from production plan
| Particulars | Trousers | Jackets | Skirts | Total |
|---|---|---|---|---|
| Units Produced /Sales | 2500 | 2600 | 3967 | |
| Unit contribution | 1000 | 850 | 900 | |
| Less Product fixed Cost | 250 | 500 | 400 | |
| Net Profit | 750 | 350 | 500 | |
| Total Gross Profit | 1,875,000 | 910,000 | 1,983,500 | 4,768,500 |
| Fixed cost Block A | (1,960,000) | |||
| Fixed cost Block B | (1,500,000) | |||
| Fixed cost Block C | (740,000) | |||
| Total Company fixed cost | (4,200,000) | |||
| Total Profit | ₦568,500 |
Note: where the attribute fixed cost is not regarded as fixed cost and therefore treated as relevant costs.
ALTERNATIVELY
Calculation of total profit
| Product | Trouser | Jacket | Skirt | Total |
|---|---|---|---|---|
| Contribution /Unit(₦) | 1000 | 850 | 900 | |
| Units Produced | 2500 units | 2600 units | 3,967 units | |
| Total contribution (₦) | ₦2500000 | ₦2,210,000 | ₦3,570,300 | ₦8,280,300 |
| Fixed costs: | ||||
| Block A | ₦1,960,000 | |||
| Block B | ₦1,500,000 | |||
| Block C | ₦ 740,000 | |||
| ₦4,200,000 | ||||
| Net Profit | ₦4,080,300 |
Note: The attributable product fixed cost is regarded as sunk cost and not relevant in view of the fact that it can be dropped in view of current output plan is different.
- Topic: Costing Systems and Techniques, Decision-making techniques
- Series: MAY 2024
- Uploader: Samuel Duah