Alpha, Beta Gama and Delta are four products manufactured by Gatty PLC. That's a plan for December 2008:


Expected demanda per month (units) Alpha Beta Gama Delta
5,000 4,000 3,000 4,000
£per unit £per unit £per unit £per unit


Direct Material 25.00 15.00 25.00 22.00
Direct Labour (paid £12per hour) 30.00 60.00 40.00 35.00
Prime Cost 55.00 75.00 65.00 57.00
Factory overheads:
Variable machine running costs
(£50 per machine hour) 50.00 75.00 100.00 150.00
Fixed -40% of prime cost 22.00 30.00 26.00 22.80
Factory Cost 127.00 180.00 191.00 229.80
Administration overhead 7.00 7.00 7.00 7.00
Total cost 134.00 187.00 198.00 236.80
Selling Price 152.00 189.00 195.00 230.00
Net Profit/(loss) per unit 18.00 2.00 (3.00) ( 6.80)


Management is unwilling to increase the hours worked by its labour force in December 2008 beyond 50,000 per month. There is sufficient machine capacity to run the machines for 50,000 hours per month. The account has apportioned Administration and fixed factory overheads on basis that he describes as those most equitable bearing in mind the nature of the four products and facilities required for their manufacture. Whatever the volume or mix of production, the fixed factory overheads and administration overheads for the month are expected to be £399,200 and £ 112,00 respectively.
After considering all these matters, the accountant recommends that, in order to maximise profits only Alpha and Beta should be produced in December 2008.


Question:

1)Redraft the statement to show the optimum amount of each product that should be prodcued and the total profit that will be earned using an opportunity cost approach.

2) Quantify and comment on the effect on profits of the decision not to increase direct labour hours.



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