Question

DFH plc manufactures and sells three products that use the same production facilities. The annual budget has just been prepared and the projected sales, selling prices, manufacturing costs and expenses resulted in the following projections of the profit that would be generated in 2014.

	Product D	Product F	Product H	TOTAL
Sales – units	1000	1500	2000
	£	£	£	£
Sales	60 000	150 000	80 000	290 000
Variable costs of production	24 000	72 000	38 000	134 000
Fixed costs	20 000	60 000	30 000	110 000
Total costs	44 000	132 000	68 000	244 000
Profit	16 000	18 000	12 000	46 000

The total fixed costs of the company had been apportioned to products on the basis of the direct labour hours used to manufacture each product. The company only manufactures products when they are ordered and hold no finished goods in stock. The sales forecasts mean that the direct labour hours in 2014 would total 11 000 direct labour hours.

However, in the last months of 2013, it was found that the direct labour hours available in 2014 would be reduced to only 8 000 direct labour hours. Despite looking at all the possible ways to increase the direct labour hours available, it was not possible to increase the hours available in 2014.

Required

1. What quantity of the products should be made and sold to maximise the company’s profit? It is not possible to sell more than the number of units of the three products shown in the original budget. The fixed costs of the company will not be reduced as a result of the decreased number of direct labour hours.

2. Alternatively, the selling price per unit of each of the three products could be increased by 10 per cent but it is expected that this will reduce the number of units sold by 30 per cent. However, this would mean that DFH plc would be able to manufacture all the units that are expected to be ordered during 2014. What will be the total profit of the company if the prices are increased?

Answer 1

a. Profit analysis of 2014 with the reduced labour hour 8000 direct labour hours.

Products	Product D	Product F	Product H	Total
Sales Unit	1000	1500	2000
Sales	60000	150000	80000	290000
Variable Cost of production	24000	72000	38000	134000
Contribution	36000	78000	42000	156000
Fixed Cost	20000	60000	30000	110000	No change in the Fixed Cost as a result of reduction in labour hours
Profit	16000	18000	12000	46000
Rank	2nd	1st	3rd

Product F is most profitable compared to Product D and H

b.After increasing the selling price by 10%, the units sold reduced by 30%, the total loss is Euro 20,700.

	Products	Product D	Product F	Product H	Total
(a)	Sales Unit	1000	1500	2000
	Sales	60000	150000	80000	290000
(b)	Selling Price per Unit	60	100	40
©	Add 10 % increase in SP	6	10	4
	new Selling Price	66	110	44
	Variable oH per Unit	24	48	19
(d)	Reduction in sales 30%	300	450	600
	Reduced Sales in Units(a)- (d)	700	1050	1400
	New Selling Price(b)+©	66	110	44
		Product D	Product F	Product H	Total
	Sales	€   46,200.00	€   115,500.00	€   61,600.00	€   223,300.00
	Variable Cost	€   24,000.00	€     72,000.00	€   38,000.00	€   134,000.00
	Contribution	€   22,200.00	€     43,500.00	€   23,600.00	€     89,300.00
	Fixed Cost	€   20,000.00	€     60,000.00	€   30,000.00	€   110,000.00
	Profit	€     2,200.00	€   (16,500.00)	€   (6,400.00)	€   (20,700.00)