A company manufactures four products from an input of a raw material to Process 1. Following this process, product A is processed in Process 2, product B in Process 3, product C in Process 4 and product D in Process 5.
The normal loss in Process 1 is 10% of input, and there are no expected losses in the other processes. Scrap value in Process 1 is $0.50 per litre. The costs incurred in Process 1 are apportioned to each product according to the volume of output of each product. Production overhead is absorbed as a percentage of direct wages.
Data in respect of the month of October
Process
|
1
|
2
|
3
|
4
|
5
|
Total
|
|
Direct materials at $1.25 per litre
|
$'000 100
|
$'000
|
$'000
|
$'000
|
$'000
|
$'000 100
|
|
Direct wages
|
48
|
12
|
8
|
4
|
16
|
88
|
|
Production overhead
|
|
|
|
|
|
66
|
|
A
|
Product
B C
|
D
|
|
Output
|
litres 22,000
|
litres litres
20,000 10,000
|
litres 18,000
|
|
Selling price
|
$ 4.00
|
$ $
3.00 2.00
|
$ 5.00
|
|
Estimated sales value at end of Process 1
|
2.50
|
2.80 1.20
|
3.00
|
|
Required
|
|
|
|
Suggest and evaluate an alternative production strategy which would optimise profit for the month. It should not be assumed that the output of Process 1 can be changed.