- 20 Marks
Question
Paly Limited, a cottage manufacturer of aluminium products, specialises in producing kettles and cooking pots with annual sales value of N960,000 and N1,440,000 respectively.
Given below are the cost data of each of the products:
- The company allows for annual 50 weeks of operation at 40 hours per week with the following employees currently engaged in each department:
| Department | Number of Employees |
|---|---|
| 1 | 30 |
| 2 | 16 |
| 3 | 18 |
Required:
(a) Which product would give the maximum profit, and what are the associated problems that could arise? (10 Marks)
(b) Determine which product should be made and the annual profit if the product uses the same direct materials but with a maximum supply limit of N3,000,000 per annum. (5 Marks)
(c) Which product should be made, and what is the annual profit, assuming there is a shortage of skilled employees for Department 2? (5 Marks)
Answer
(a) Profitability and Associated Issues for Product Choice
- Cooking pots yield a higher profit and should be produced. Associated challenges include:
- Potential closure of the department with lower contribution, leading to severance costs.
- Need to hire more staff for Department 4.
- Labour costs for cooking pots are more sensitive to wage increases, posing profitability risks.
- Material and variable overhead costs may fluctuate, affecting cost stability.
- Risk of losing goodwill and sales if production lines change.
b. 
Pot should be produced because it has a higher contribution margin per N of materials.
c. 
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