B Ltd. is a company that has, in stock, materials of type XY that cost ` 75,000, but that are now… 1 answer below »

B Ltd. is a company that has, in stock, materials of type XY that cost ` 75,000, but that are now obsolete and have a scrap value of only ` 21,000. Other than selling the material for scrap, there are only two alternative uses for them. Alternative-1 Converting the obsolete materials into a specialized product, which would require the following additional work and materials: Material A 600 units Material B 1,000 units Direct Labour 5,000 hours unskilled 5,000 hours semi skilled 5,000 hours highly skilled Extra selling and delivery expenses ` 27,000 Extra advertising ` 18,000 The conversion would produce 900 units of saleable product and these could be sold for ` 300 per unit. Material A is already in stock and is widely used within the firm. Although present stocks together with orders already planned, will be sufficient to facilitate normal activity and extra material used by adopting this alternative will necessitate such materials being replaced immediately. Material B is also in stock, stock, but is unlikely that any additional supplies can be obtained for some considerable time, because of an industrial dispute. At the present time material B is normally used in the production of product Z, which sells at ` 390 per unit and incurs total variable cost (excluding Material B) of ` 210 per unit. Each unit of product Z uses four units of Material B. The details of Materials A and B are as follows: Material A Material B (` ) (` ) Acquisition cost at the time of purchase 100 per unit ` 10 per unit Net realizable value 85 per unit ` 18 per unit Replacement cost 90 per unit – Alternative-2 Adopting the obsolete materials for use as a substitute for a sub-assembly that is regularly used within the firm. Details of the extra work and materials required are as follows: Material C 1,000 units Direct Labour: 4,000 hours unskilled 1,000 hours semi-skilled 4,000 hours highly skilled 1,200 units of the sub-assembly are regularly used per quarter at a cost of ` 900 per unit. The adaptation of material XY would reduce the quantity of the sub-assembly purchased from outside the firm to 900 units for the next quarter only. would increase to ` 1,050 per unit for that quarter. Material C is not available externally thought 1,000 units required would be available from stocks, it would be produced as extra production. The standard cost per unit of Material C would be as follows: (`) Direct labour, 6 hour unskilled labour 18 Raw materials 13 Variable overhead: 6 hours at ` 1 06 Fixed overhead: 6 hours at ` 3 18 55 The wage rate and overhead recover rates for B Ltd. are: Variable overhead ` 1 per direct labour hour Fixed overhead ` 2 per direct labour hour Unskilled labour ` 3 per direct labour hour Semi-skilled labour ` 4 per direct labour hour Highly skilled labour ` 5 per direct labour hour