Question

Halbert plc manufactures and sells three products that use the same production facilities. In the plan for 2011, the details of each product were:-

Product                                                                      K                     L                      M

                                                                                    £                     £                     £

Selling price per unit                                               70                    45                    30

Variable costs per unit                                            35                    25                    12

Apportioned fixed costs per unit                            20                    10                   10

Profit per unit                                                            15                    10                     8

Estimated sales – units                                   15 000           20 000           20 000

Estimated profit - £000                                         225               200                 160                  

When the budget was prepared, the total fixed costs were estimated to be £700 000 and the output was expected to be 140 000 direct labour hours. An overhead recovery rate of £5 per direct labour hour was used to apportion the fixed costs to products. As a result of unforeseen circumstances, the capacity has been reduced to only 105 000 direct labour hours in 2011 but the total overhead costs will remain at a total of £700 000.

Required

1. What products should be produced and sold to maximise the company’s profit now that the production hours have been reduced and what will be the total profit of the company?

2. As an alternative to turning away orders, it has been suggested that the selling price of all three products should be increased by 10 per cent. It is expected that this will reduce the demand for each product by 25 per cent. This would reduce the required direct labour to the 105 000 hours that are now available. Would this result in a better outcome than that the one resulting from the strategy proposed in part (a)?

Answer 1

Answer is given below