MI 2020 Prelim Paper 2 Ans

1 Answer to P2 Prelim 2020 1(a) Only really useful for making short term decisions as it ignores fixed cost. Not all costs can easily be classified as either fixed or variable 1(b) Working: Jen Kit Mat Total production and sales units 6 000 7 000 8 000 Unit costs: Selling price Raw materials @ $10 per kilo Direct labour $ 72 30 6 $ 90 40 8 $ 136 60 10 Total fixed costs $750 000 Contribution 36 42 66 Raw materials per unit (kg) 3 4 6 Contribution per kilo 36/3= 12 42/4= 10.5 66/6=11 Rank 1* 3* 2* Option 1 Units Kilos $ Jen 6 000 x 3 = 18 000 6 000 x $36 = 216 000 Mat 8 000 x 6 = 48 000 (8 000 x $66 = 528 000 Kit 2 000 x 4 = 8 000 2 000 x $42 = 84 000 74 000 CM 828 000 Fixed costs (750 000) * Profit 78 000 Option 2 Units Kilos Jen 5 000 x 3 = 15 000 Kit 5 000 x 4 = 20 000 Mat 5 000 x 6 = 30 000 65 000 Material remaining 9 000 74 000

2 The product which has the highest contribution margin per limiting factor is Jen. Therefore the remaining materials should be used first to make Jen. 5000 units have already been ,made and the maximum required is 6 000. Therefore a further 1 000 units of Jen should be made. This will use 3 000 kilos of material The final balance of materials (6 000 kilos) will then be used to make 1 000 unit of Mat the product yielding the next highest contribution margin per kilo of material. Total profit under this option is: Units Kilos $ Jen 6 000 x 3 = 18 000 6 000 x $36 = 216 000 Kit 5 000 x 4 = 20 000 5 000 x $42 = 210 000 Mat 6 000 x 6 = 36 000 2m 6 000 x $66 = 396 000 74 000 CM 822 000 Fixed costs (750 000) * Profit 72 000 1 (c) Explanation: The two profit figures show only a small difference between them , with the option to meet the 5 000 sales requirement giving the lower profit . If this option is chosen, then all customers will be happy and Samuel should keep them for the future. However, Samuel needs to determine whether or not the shortage of materials will be permanent. If it is, then he will need to talk to his customers about their future requirement. He will also need to consider an alternative source of material. Decision: In light of this, if the problem is a short-term one, then the second option should be selected, as all customers will be happy.

3 2 (a) Computation of total budgeted overhead cost Base Machining Assembly Maintenance Canteen $ $ $ $ Indirect expenses 120 100 80 050 40 000 15 000 Reallocation of canteen costs No, of employees 3 000 9 000 3 000 (15 000) 43 000 - Reallocation of Maintenance costs No. of Maintenance Requisitions 34 4