A.

Budgeting Decisions
Kim Cuong produces three different models of products, A, B and C. Project Sales Direct material Direct Labour Variable over head Fixed overhead Sales ( units) Original Budget
Product Sales (units) Sales Direct material Direct labour Variable overhead Fixed overhead Profit A 2,000 200,000 10,000 22,500 10,000 6,000 48,500 151,500 B 1,750 250,000 13,500 25,000 13,500 9,000 61,000 189,000 C 1,300 300,000 20,500 34,000 20,500 7,500 82,500 217,500 Total 5,050 750,000 44,000 81,500 44,000 22,500 192,000 558,000

A $200,000 $10,000 $22,500 $10,000 $6,000 2,000

B $250,000 $13,500 $25,000 $13,500 $ 9,000 1,750

C $300,000 $20,500 $34,000 $20,500 $ 7,500 1,300

The original budgets total profit is $558,000 Per unit information A

Selling price per unit Direct material per unit Direct labour per unit Variable overhead per unit Direct labour rate Direct labour hours (total hours) Direct LH per unit 100.00 5.00 11.25 5.00 5 4,500 2.25

B
142.86 7.71 14.29 7.71 5 5,000 2.86

C
230.77 15.77 26.15 15.77 5 6,800 5.23

Estimated Demand for Sales Increases (30%)

Sales (units) (increased by 30%) A 2,600 B 2,275 C 1,690 Total 6,565

Direct labour hours needed Sales (increased by 30%) Direct labour hours available Surplus/(Deficit)

5,850 260000

6,500 325000

8,840 -249,265

21,190 335735.3 18,000 -3,190

The total hours needed is 21,190 while the available hours are just 18,000. This means that the direct labour hours become a limiting factor. Therefore the contribution per direct labour hour needs to be calculated.
A 157,500 4,500 35 2 B 198,000 5,000 40 1 C 225,000 6,800 33 3

Contribution magin (total $) Direct labour hours (total hours) Contribution per DLH Rank

When the sales of each product increase 30% with the direct labour limited to 18,000 hours, all the available direct labour hours will be used to produce the Sales units of product B first(the contribution per DLB 40 is highest ),then product A (the second contribution). The remaining direct labour hours will be used to produce product C(the contribution per DLH is lowest)

Direct labour hours available allocated to each product as follows Allocation of Direct Labour Hours Available
Direct labour hours available A 5,850 B 6,500 C 5,650 Total 18,000

Revised Budget for Sales Increases (30%)

A Sales (units) Sales Direct material Direct labour Variable overhead Fixed overhead Advertising cost Profit 2,600 260,000 13,000 29,250 13,000 6,000 198,750 B 2,275 325,000 17,550 32,500 17,550 9,000 248,400 C 1,080 249,265 17,033 28,250 17,033 7,500 179,449 Total 5,955 834,265 47,583 90,000 47,583 22,500 8,000 618,599

Fixed overhead on the basis of Sales ($) Total sales ($) Total fixed overhead Fixed overhead per dollar in Sales 843,265 30,500 0.04

Extra Profit based on Extra 3,500 Direct Labour Hours

Additional Sales (units) Additional Sales ($) Additional Direct material Additional Direct labour Additional Variable overhead Additional Fixed overhead Increase in Profit 610 140,735 9,617 15,950 9,617 105,551

Therefore, if the company has extra 3,500 labour hours, the profit will increase $105,551