BSN Limited
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BSN Limited You are the Management Accountant of BSN Limited, and you have been charged with considering which of three products to produce within the newly opened Boston based factory. The following information is available for each of the three products under consideration: Product A Product B Product C Product A Estimated annual sales Direct labour required per unit Direct material X required per unit Direct material Y required per unit Variable overhead cost per unit Estimated sales price per unit 30,000 unit 2,25 hours 4.8 kg 1.3 kg $9.90 $75.00 Product B 45,000 unit 1,75 hours 3.2 kg 4.5 kg $7.70 $67.50 Product C 27,000 unit 2,75 hours 7.4 kg 2.3 kg $12.10 $79.90
In addition, you have also determined: · All direct labour workers are paid a standard rate of $8 per hour · Material X currently costs $2.50 per kilogram · Material Y currently costs $6.00 per kilogram Estimated fixed overheads for the upcoming year are as follows: £’000 Heating and lighting 250 Rent and rates 375 Depreciation 180 Required: Prepare a report to the Finance Director of BSN Limited, covering the following issues: a) The Finance Director has requested that you prepare briefing notes for the production team at the Boston factory to explain the process of break-even analysis. This should include a discussion of the different types of cost behaviour, the relationship of contribution to costs, and the concepts of the break-even point and the margin of safety, as well
as the advantages and limitations of break-even analysis in practice. (20 marks) b) By determining the contribution per unit and the total contribution received if: i) only Product A is produced ii) only Product B is produced iii) only Product C is produced Explain which product should be produced by BSN Limited (assuming only one product will be produced)? (20 marks c) Calculate the number of units that must be sold to break-even if: i) only Product A is produced ii) only Product B is produced iii) only Product C is produced Comment on the results of your analysis, including a discussion of the margin of safety for each approach. (20 marks) d) You have recently been informed that if the production line is modified at a one-off fixed cost of £150,000, the existing machinery can be used to produce all three products (with no change to the variable costs of production). However, there is currently a national shortage of material X. 300,000 kgs of material X are held within the Boston factory and are available for production. You have been asked by the Finance Director to determine (and explain) the production mix of products A, B and C that will result in the maximum contribution and profit in the upcoming year. Assume that no additional material X will be available for purchase. (30 marks)
In addition, you have also determined: · All direct labour workers are paid a standard rate of $8 per hour · Material X currently costs $2.50 per kilogram · Material Y currently costs $6.00 per kilogram Estimated fixed overheads for the upcoming year are as follows: £’000 Heating and lighting 250 Rent and rates 375 Depreciation 180 Required: Prepare a report to the Finance Director of BSN Limited, covering the following issues: a) The Finance Director has requested that you prepare briefing notes for the production team at the Boston factory to explain the process of break-even analysis. This should include a discussion of the different types of cost behaviour, the relationship of contribution to costs, and the concepts of the break-even point and the margin of safety, as well
as the advantages and limitations of break-even analysis in practice. (20 marks) b) By determining the contribution per unit and the total contribution received if: i) only Product A is produced ii) only Product B is produced iii) only Product C is produced Explain which product should be produced by BSN Limited (assuming only one product will be produced)? (20 marks c) Calculate the number of units that must be sold to break-even if: i) only Product A is produced ii) only Product B is produced iii) only Product C is produced Comment on the results of your analysis, including a discussion of the margin of safety for each approach. (20 marks) d) You have recently been informed that if the production line is modified at a one-off fixed cost of £150,000, the existing machinery can be used to produce all three products (with no change to the variable costs of production). However, there is currently a national shortage of material X. 300,000 kgs of material X are held within the Boston factory and are available for production. You have been asked by the Finance Director to determine (and explain) the production mix of products A, B and C that will result in the maximum contribution and profit in the upcoming year. Assume that no additional material X will be available for purchase. (30 marks)
