Reference no: EM131650046

Question 1

Cleo Limited manufactures and sells two types of products, including X and Y. The company is now considering to produce new product - Z.

To decide whether or not to produce the new product Z. the following information has been provided:

(1) The normal selling prices, annual sales volumes and total variable costs for the two products are as follows:

	X	Y
Annual sales units	6,000 units	3.000 units
Selling price per unit	$200	$180
Costs per unit:
Direct materials	$50	$70
Direct labour	$60	$40
Variable overheads	$20	$40

(2) The company intended to produce 4,000 units of product Z with selling price of $150 per unit. However, this could scarify the resources in producing X and Y. It is expected that the sales of X and Y could be decreased by 5% and 10% respectively.

(3) Direct labour cost for product Z is estimated to be $60 per unit. However, a one-otT retraining costs of $22,000 is needed in order to train the employees to work in the new production line. Also, a supervisor with annual salary of $20,000 will be employed to supervise the production of new product Z.

(4) Cleo Limited operates a just in time (JIT) policy and so all material cost would be ordered only if production of product Z started. The company expected that direct material cost for product Z is $60 per unit. However, the material supplier has a volume based discount scheme in place as follows:

Total annual expenditure ($)	Discount
0-200,000	1%
200,001-400,000	2%
400,001-600,000	3%
600,001-800,000	4%
800,001-1,000,000	5%

Cleo Limited uses this supplier for all its materials for all the products it manufactures. The figures given above in the cost per unit table for material cost per unit are gross of any discount Cleo Limited qualifies for.

(5) The variable overhead for product Z is estimated to be $10 per unit.

(6) The company currently rents some part of the factory to third party for rental income of $30,000. However, this factory space will be used back by the company for the production of new product Z.

Required:
(a) Discuss whether or not it is worthwhile to produce the new product Z. (ignore any adjustment to allow for the time value of money).

(b) Apart from manufacturing the new product Z itself, Cleo Company could outsource the production to third party. Briefly describe THREE advantages and THREE disadvantages of outsourcing the production of product Z to third party.

Question 2

Peal Limited is a manufacturing company which produces three products - A, B and C. The company is now preparing the budget for the 2017. The sales and costs information of the three products per unit are listed below:

	A	B	C
Expected market demand (units)	12,000 units	18,000 units	15,000 units
Selling Price per unit - High Demand	$180	$220	$220
Selling Price per unit - Low Demand	$160	$180	$200
Costs per unit:
Direct labour ($40 per hour)	$60	$80	$70
Direct materials ($25 per kg)	$30	$40	$50
Variable overhead	$16	$20	$10
Variable selling overhead	$12	$18	$15
Fixed overhead	$250,000	$180,000	$230,000
Buying price from outsiders	$120	$160	$160

The company will adjust its selling price on the basis of the reaction of the market. It is expected that the market demand is low in 2017. However, the company estimated that direct material is limited to 60,000 kg and direct labour is restricted to 85,000 hours for the year 2017. For those products it cannot produce, the company will buy it from outsiders.

Required:

(a) Determine the limiting factor for Peal Limited

(a) Calculate the sales mix and the production plan which will maximize the firm's profit.

(c) On the basis of the sales mix you identified in Part (b) and outsource the production of remaining unproduced products to third party, calculate the overall profit for Peal Limited.

(d) Explain TWO benefits and TWO limitations of Cost-Volume-Profit (CVP) Analysis.

(e) Explain the term "limiting factor" and its relationship to profit maximization. A part from direct labour or direct material, give one example of a limiting factor.