Reference no: EM13377564

Case Study

Thorn Ltd produces and sells three products - X, Y and Z. Relevant information is given below.

		Product X	Product Y	Product Z
		£ per unit	£ per unit	£ per unit
Standard costs:
Direct materials		200	480	360
Variable overhead		48	28	64
	Rate per hour £	Hours per unit	Hours per unit	Hours per unit
Department A	10	28	16	30
Department B	12	8	6	10
Department C	8	16	8	30

Total fixed overhead for the year was budgeted at £2,400,000.

The budget for the current financial year, which was prepared for a recessionary period, was based on the following sales:

Product	Sales in units	Selling price per unit
		£
X	15,000	840
Y	12,000	880
Z	12,000	1,200

The market for each of the products has improved, however, and the sales director believes that without a change in selling prices, the number of units sold could be increased for each product by the following percentages:

Product	Increase
X	20%
Y	25%
Z	33?%

When the sales director's views were presented to a management meeting, the production director declared that although it might be possible to sell more units of product, output could not be expanded because he was unable to recruit more staff for Department B, there being a severe shortage of the skills needed by this department.

Required:

As the management accountant, you are required to prepare a report for the directors which deals with the following requirements

(a) (i) Show in the form of a statement for management, the unit costs of each of the three products and the total profit expected for the current year based on the original sales figures.

(ii) State the profit if the most profitable mixture of the products was made and sold, utilising the higher sales figures and the limitation on Department B.

(iii) Identify and comment on three possible problems which may arise if the mixture in (a) (ii) above were to be produced.

(iv) Explain briefly the ways in which management can increase production of product X.

(b) Describe briefly a technique for determining optimum output levels when there is more than one input constraint.

(c) Describe briefly three ways in which the overall contribution to sales ratio could be improved.

High marks will be gained where clear understanding of management accounting issues and skills are demonstrated. If you have any doubts about the requirements make your own sensible assumptions and state them.

Report format and bibliography. Marks will be awarded for structure and presentation. (This report layout, clarity of explanation and ability to summarise your findings).