Question

QUESTION TWO
Sanders Ltd is a manufacturing company producing two joint products P1 and P2 in the ratio of 3:1 at the split-off point. The two products are taken to the mixing plant for blending and refining after the split off point. The following information is also provided:

Product P1 Product P2
Sales volume (litres)
Selling price per litre
Joint process costs*
Blending and refining costs
Other separable costs (all variable)
*Joint costs are apportioned on the basis of volume 300,000
Sh.3,500
Sh.300,000,000
Sh.250,000,000
Sh.50,000,000 100,000
Sh.7,000
Sh.100,000,000
Sh.250,000,000
Sh.20,000,000

The joint process costs are 70% fixed and 30% variable whereas the mixing plant costs are 30% fixed and 70% variable. There are only 5000 hours available in the mixing plant. Usually 4000 hours are taken in processing of Product P1 and P2, 2000 hours for each product while the remaining 1000 hours are used for other work that generates a contribution of Sh.100,000 per hour.

The company is now planning to change the production mix of the joint process to 3:2 for product P1 and P2 respectively. This change will result in an increase in the joint cost by Sh.500 for each additional litre of P2 produced.

Required:
(a)   Advise the company on whether to change the production mix.    (7 Marks)

(b) Explain other qualitative factors that are important to consider before changing the production mix.

Answer 1

a) proposed poodccifon P, = 375 X 100,000 = 240,000 IPhoes p. = 215 X 400.000 = 160.000 (stres Cost benefft acolyses. Incoemental devece Foom Pa (60000 x 7000) 420000000 loss of Terence from P, C60000 x 3500) 21000,00 Nel en cremental devence 210,000.00 Incremente costs Job pocessing cost (cooox900) 30000000 Blend lg ad reffoong Extra cost of Pe 250 MIO. M*07*60000 = 105.000000 Saving of P, 250 million 10.3m*0.7 #60,000 -> 35.000.000 70000000 Otheo seperable costs (0.3-2.50) 60000 100000000 oppoo ton Pty coot (40-2)* 100000 200.000,000 Net Provementos devenue C 190000000) Sanders should not change pooded-mpx since changing descelt to loss of-sh-190 million. b. 1. Marketing stoclegy Prodeech dosigo , accely coveolispro podnotion dostáiblion channels among others will afleco-pore decision 2. powdeede-19e cycle It Ps essential to take into consideration the stage of which the Dondeech-B Po pofcing de desert poodooch file stage ccelos Foo dicocot porce 3. compertoos and moskel- Type of the morcea Anchach the from ouerales dictates the poscana policy to a large extend 4. pace & demand relationship. The decision malceo shoceed understand how pofce elleds comand eloste city of porce. These factors are the impostech to consider before Changing the proceed too max.