Question

A. Fruity Ltd. produce 3 types of Sweets. The details below are of costs of production for the products. (All costs are per unit).

			Apple	Banana	Mixed
			£	£	£
Selling Price			45	50	70
Material – Direct (£3 per litre)			6	3	12
Labour – Direct (£4 per hour)			2	8	6
Variable Overheads			4	16	12
Fixed Overheads			3	12	9

If Fruity Ltd. was going through a period of shortages in materials (direct).

Required:

a) Calculate what would be the most profitable way of production for the company.

B. In July 2016 the company started producing two ink products, Blue Ink and Red Ink. The cost of the production is below:

During July 2016, the fixed costs of production were £638,000. For every 5 Blue Ink units sold, the company was selling 4 units of Red Ink. Annual budgeted sales in the standard max were £2,333,450.

		Blue Ink	Red Ink
		£	£
Unit Selling Price		70	50
Unit variable cost		46	31
		24	19

Required:

b) Calculate the margin of safety as a percentage (%).

Answer 1

Calculation of contribution per unit

particulars	apple	banana	Mixed
selling price (A)	45	50	70
direct material	6	3	12
direct labor	2	8	6
variable overhead	4	16	12
total cost (B)	12	27	30
contribution	33	23	40

having considered the scarcity of the raw material, the constraint in availing the raw material is denominated in the ability of contribution generation

Particulars	Apple	Banana	Mixed
contribution per unit	33	23	40
consumption of raw material per unit cost of raw material per unit/cost of material per KG	6/3=2kg	3/3=1kg	12/3=4kg
contribution per kg	33/2=16.5per kg	23/1=23 per kg	40/4=10 per kg

conclusion: It is obviosly understood from the above that the firm enjoys greater contribution in the case of BANANA. The best way of production is that the company should manufacture Banana first as it gives higher contribution per unit of material that is 23 per kg and then it should produce Apple that gives contributionof 16.5 per kg because it gives next best contribution and then the Mixed sweet that gives contribution of 10 per kg should be produced.