Reference no: EM132107029

Question - A processing company, Timao Co. Ltd., is extremely busy. It has increased its output and sales from 12,900 kg in 1st quarter of the year to 17,300 kg in the 2nd quarter. Although demand is still rising, it cannot increase its output more than an additional 5% from its existing labour force, which is now at its maximum.

Data for its four products in 2nd quarter were:

	Product	Product	Product	Product
	P	Q	R	S
Output (Kg)	4560	6960	3480	2300
Selling price (Sh. Per kg)	162	116.40	99.20	136.80
Costs (Sh. Per kg)
Direct labour @ Sh.60 per hour)	19.60	13.00	9.90	17.00
Direct materials	65.20	49.00	41.00	54.20
Direct packaging	8.40	7.40	5.60	7.00
Fixed overhead
(Absorbed on basis of direct labour cost)	39.20	26.00	19.80	34.00
	132.40	95.40	76.30	112.20

The Kagocho Company has offered to supply 2000 kg of product Q at a delivered price of 90% of Timao's Co. Ltd. Selling price. Timao Co. Ltd., will then be able to produce extra of product P instead of product Q to the plant's total capacity.

Required:

a) State with supporting calculations, whether Timao Co. Ltd should accept the Kagocho Company's offer.

b) Which would be the most profitable combination of subcontracting 2000kg of one product at a price of 90% of its selling price and producing extra quantities of another product up to the plant total capacity?

Assume that the market can absorb the extra output.