- 30 Marks
Question
Kikelomo Limited manufactures three products K, T, and F, using different quantities of the same resources. Budget information per unit is provided:
| K | T | F | |
|---|---|---|---|
| Market selling price | 1,800 | 2,520 | 3,000 |
| Direct labour (₦140/hour) | 280 | 560 | 700 |
| Material A (₦60/kg) | 300 | 240 | 420 |
| Material B (₦120/kg) | 480 | 720 | 600 |
| Variable overhead (₦80/hour) | 160 | 320 | 400 |
| Fixed overhead | 240 | 140 | 240 |
| Total cost | 1,460 | 1,980 | 2,360 |
| Profit | 340 | 540 | 640 |
| Total budgeted sales units | 500 | 800 | 1,600 |
The budgeted sales are for the month of June but do not include an order from a major customer to supply 400 units per month of each of the three products at a discount of ₦200 per unit. During June, management anticipates a shortage of material B, with only 17,500 kgs available. Kikelomo Ltd cannot hold inventory of raw materials, work-in-progress, or finished products.
Required:
a. State THREE factors that may cause input materials to be a budget constraint and identify steps to overcome this constraint. (6 Marks)
b. Prepare calculations to show production that will maximise Kikelomo Ltd’s profit for June. (9 Marks)
c. Kikelomo Ltd has realised that the contract with the major customer does not have to be fully met, but a financial penalty may apply. Calculate the lowest value of the financial penalty to ensure the order is met in full. (6 Marks)
d. Assume the material B shortage will continue and management has decided to outsource some production. Advise management on the advantages and disadvantages of outsourcing. (9 Marks)
Answer
a)
Factors:
- Shortage of supply due to external disruptions (e.g., import issues, natural disasters).
- Limited specialist storage space for materials.
- High material losses during production.
Steps to overcome:
- Forward ordering or securing substitute materials.
- Renting additional storage facilities.
- Improving efficiency and training to reduce losses.
b) Computation of Production that maximises profit
Ranking the products using contribution/kg of material B
c) Producing with no special emphasis on special order
Producing with Emphasis on Special order
Optimal Production
d)
Advantages of outsourcing:
- Allows Kikelomo to focus on core competencies.
- Reduces capital expenditure on production.
- Provides operational flexibility and improved customer satisfaction.
Disadvantages of outsourcing:
- Loss of control over quality.
- Risk of supplier issues affecting production timelines.
- Potential reputational damage if the supplier fails to meet standards.
- Topic: Budgeting and Budgetary Control
- Series: NOV 2021
- Uploader: Kwame Aikins