Drake Ltd Industrial Product Details

Selling price

1.Drake Ltd makes three products for industrial use, with the following details per unit:

	£	£	£
Selling price	110	140	100
Direct labour (£12 per hour)	30	24	36
Direct material A (£5 per litre)	10	5	0
Direct material B (£8 per kilo)	16	0	32
Variable overhead: Labour related	3	2.4	3.6
Machine related	5	7	3
Component XG		50
Total variable cost		88.4	74.6
Machine hours per unit	5	7	3
Maximum demand per week	800	3,000	2,400

Component XG, used in product RG50, is currently purchased from an outside supplier but could be made internally using the following resources; 

Direct labour:       1 hour Direct material B: 2 kgs. 

Machine time:      0.5 hour 

In addition to the demand shown above Drake Ltd has signed a contract with a new customer Brook Ltd to provide the following units each week for the next six weeks: 

Product units 

RG40 200 

RG50 200 

RG60 300 

The machine hours available each week are 37,500 hours. 

The purchasing manager has been informed by suppliers that for the next six weeks the availability of Material B will be restricted to 12,000 kg Required: 

a)Alison Drake, The Director of Drake Ltd is not an accountant. She wishes to know the most profitable weekly use of the restricted machine hours and material B resources during each week of the next six weeks, including whether to produce component XG or continue to outsource it. (Linear programming is not required). She also wants to know the impact on profits of Drake Ltd if the new contract with Brook Ltd could be deferred for six weeks.

Prepare statements to calculate the above information.  

b)Using your workings, describe clearly to Alison Drake how the information provided by each of the statements you have prepared is used to calculate how she should proceed during the six weeks and give your recommendations.   

3.The Choco Spread department of a food processing company produces one type of product, a 5 kilo pack of chocolate spread (Choco Spread) for use in the catering industry.

Standard cost		Budget
1 pack		500,000 packs
	£	£000
Sales	6.00	3,000
Chocolate grounds 2 kilos x £0.44 per kilo	(0.88)	(440)
Milk concentrate 3.3 kilos x £0.20 per kilo	(0.66)	(330)
Total variable cost	(1.54)	(770)
Contribution Fixed costs	4.46	2,230
Production overhead costs		(1,800)
Ingredients Delivery		(76.5)
Despatch to Customers		(100)
Net income		253.5

The delivery of ingredients, process and delivery to customers all work on a Just in Time (JIT) basis. The production is fully automated so the fixed costs incorporate all production costs.

For the month of March the following budget was prepared based on a sales quantity of 500,000 packs of Choco Spread.

The actual activity for March was as follows: 

460,000 packs of Choco Spread were produced and sold, giving total sales receipts of £3,059,000. 

Actual Material used Quantity used Total cost 

Chocolate grounds   950,000 kg £446,500 

Milk concentrate 1,450,000 kg £275,500 

Actual fixed overhead costs Fixed production cost £1,860,000 

Ingredients delivery     £73,000 

Despatch £88,000 

Required: 

a)Calculate the following variances:

Sales contribution volume and sales price variances,

Materials Price variance, and usage variance for each material,

Direct labour (£12 per hour)

Expense variances for Fixed production overhead costs,

Fixed ingredients delivery cost and Fixed despatch to customers cost.

3. b)Calculate Materials mix and yield variances and explain why the figures you have calculated are useful.  

c)Comment on the main areas of difference between the budget and actual performance for the month of March and explain the ways in which managers can use the information to improve future performance.

d)Management considers that the cost for “Ingredients Delivery” and “Despatch to Customers” are not fixed but also do not vary with sales quantity. The following information relates to the budget for these activities:

Ingredients delivery of 5.1 kilos per product: 

The standard quantity per delivery is 1000 kg. The budgeted cost is £76,500. 

Despatch to customers:  

 The standard despatch quantity is 200 packs. The budgeted cost is £100,000. 

Using an activity based approach for these two costs, calculate the activity based standards and show the variances which arise. Explain clearly why this information is more useful than the variances for these costs calculated in part (a) above.

6. RD Tower Ltd is a company which makes a range of kitchenware products. One of these products, the Premier frying pan, has been subject to intensive competition from a rival company during the last year. The company is reviewing the product and planning for the year ended 30th June 2021.The financial accountant has provided you with the following information pertaining to this product for the six months to April 2020:

	(units) £
November	2,925 56,475
December	2,625 54,375
January	3,000 57,000
February	3,150 58,050
March	3,675 61,725
April	2,700 54,900

Required: 

a)The current selling price of the frying pan is £25 per unit. Assuming that during the year ended 31st June 2021, the monthly fixed costs and the variable costs remain the same as the six months to April 2020, how many units would RD Tower Ltd need to make and sell to break even for the year ending June 2021?   (5 marks)

b)Assuming that the total units made and sold for the year ended June 2021 are at the same monthly level as the six months to April 2020, calculate the profit for the year ending June 2021. In addition, calculate the margin of safety percentage for this product and calculate how many units of this product would need to be sold in order for the company to make a profit of £300,000. 

c)A number of untested, possible proposals have been put forward to try to increase the profitability of the product for the coming year to 30th June 2021.

Proposal 1:   Reduce the price by 5% which is hoped would win customers away from the competition and it is estimated that unit sales demand would rise by 8% per year. 

Proposal 2: Reduce the price by 2.5%, and increase the advertising budget for this product by £40,000 per year. It is estimated that unit sales demand would rise by 12% per year as a consequence of these actions. 

Proposal 3: Spend an extra £2 per unit on the product to improve the quality of the product, therefore changing its position in the market. The product could then be sold for £28. Relaunch the product spending £75,000 on advertising per year. It is estimated that unit sales demand per year would rise by 20% as a consequence of these actions. 

Calculate the estimated profit for each proposal and, based on profitability alone,  recommend, with reasons, one of the proposals.  

d) With regard to the proposals in part c) discuss the other business factors and information which need to be investigated before a decision can be adopted.