Question

PK Ltd manufactures four types of mobile phones which all use “goggles”, a component made in only one factory. Each goggle costs $50 to purchase. Due to a prolonged strike in the goggle factory, PK Ltd will only be able to purchase 20,000 goggles this year. The following information relates to each type of mobile manufactured by PK Ltd: Mobile A Mobile B Mobile C Mobile D Maximum demand(units) 11000 3000 3500 700 Cost per mobile: $ $ $ $ Goggle 50 100 200 350 Other direct materials 30 80 98 300 Direct Labour 30 40 30 55 Fixed Costs 60 80 40 70 Profit per mobile 50 70 52 490 Selling Price per mobile 220 370 420 1265 (a) Calculate the numbers of each type of mobile to be produced and sold that would maximize the profit of PK Ltd. (b) Prepare a Marginal Income Statement showing the profit for the year. PK Ltd has been approached by an outside supplier who can supply any of the four mobile phones at a cost of 80% of PK Ltd’s selling price. (c) Calculate the overall profitability if PK Ltd wants to supply all the four types of mobile phones at normal capacity. 3 (d) Identify and explain two issues which PK Ltd should take into account when buying ready-made mobiles from an outside supplier. (e) PK Ltd has a normal credit period of 55 days. The new policy of company is to allow a discount of 3% for payment within 12 days. The company operates a bank overdraft at 16.5% per annum. You are required to calculate the cost of the discount for Rs100 sales and advise if any

Answer 1

a.	First we need to calculate contribution per unit of goggle
			Mobile A	Mobile B	Mobile C	Mobile D
		Profit per unit	50	70	52	490
		fixed cost per unit	60	80	40	70
		contribution per unit	110	150	92	560
		Cost of Goggles	50	100	200	350
		cost per goggle	50	50	50	50
		No of Goggle used	1	2	4	7
		Contribution per unit of Goggle	110	75	23	80
		Ranking	1	3	4	2
	No of units to be produced to maximize the profit
		Maximum supply of Goggle is 20,000 units
			Maximum Demand	No of unit to be produced	Goggle used	Net Goggle units after use
		Mobile A	11000	11000	11000	9000
		Mobile D	700	700	4900	4100
		Mobile B	3000	2050	4100	0
		Mobile C	3500	0	0
b.	Statement of marginal profit
		Particulars	Mobile A	Mobile B	Mobile C	Mobile D	Total
		No. of units to be produced	11000	2050	0	700	13750
		Contribution per unit	110	150	92	560
		Total Contribution	1210000	307500	0	392000	1909500
		Total Fixed Cost	11000*60	3000*80	3500*40	700*70	1089000
		Net profit					820500
c.	Stement of profit if PK Ltd. Wants to supply all the Phones at normal capicty
		Particulars	Mobile A	Mobile B	Mobile C	Mobile D	Total
		No. of units to be sold	11000	3000	3500	700	18200
		Selling price per unit	220	370	420	1265
		contribution @20%	44	74	84	253
		Total contribution	484000	222000	294000	177100	1177100
		Total Fixed Cost					1089000
		Total Profit					88100
d.	1. PK Ltd should consider the quality of mobile phones being supplied by the outside supplier
	2. PK Ltd should consider that will outside supplier ready to suppy mobile phones as and when needed?
e.	Interest cost that can be saved by getting early peyment :-
	Reduction is payment days(55-12)		43
	Reduction in interest payment (100*16.5%*(43/365)	1.9438
	Discount to be allowed		3
	Net Loss		-1.0562
	PK Ltd should not aloow discount since it will increase loss