Reference no: EM133156345

Question - Essel World Ltd manufactures four (4) products. The annual demand for the products, their selling prices and variable production costs are as follows:

Products P Q R S Demand (units) 120,000 186,000 171,000 99,000

Selling price ($) 23.90 28.70 55.00 47.90

Direct material cost per unit ($) 10.08 13.20 30.48 24.96 Direct labour cost per unit ($) 4.08 4.10 6.72 6.38

Variable overheads per unit ($) 1.44 1.40 2.40 2.16

Additional information:

The variable overheads are absorbed on a machine hour basis at a rate of $1.20 per machine hour.

Total fixed overheads amounted to $4,684,000 per annum.

Production capacity available was 815,000 machine hours per annum.

Products P, Q and R can purchased from an external supplier at $21.36 per unit, $24 per unit and $48 per unit respectively.

Required -

(a) As a management accountant of Essel World Ltd, you are required to determine how many units of each product are to be produced in-house and how many of them are to be bought in from the market with a view to maximise profit. Show detailed calculations in support of your answer.

(b) Prepare a profitability statement detailing the contribution from each product and the total profit which the company can generate based on your answer to requirement (a) above.