BSN Limited

You are the Management Accountant of BSN Limited, and you have
been charged with considering which of three products to produce
within the newly opened Boston based factory. The following
information is available for each of the three products under
consideration:

Product A Product B Product C

Product A Product B Product C

Estimated
30,000 unit 45,000 unit 27,000 unit
annual sales
Direct labour
2,25 hours 1,75 hours 2,75 hours
required per unit
Direct material X
4.8 kg 3.2 kg 7.4 kg
required per unit
Direct material Y
1.3 kg 4.5 kg 2.3 kg
required per unit
Variable
overhead cost $9.90 $7.70 $12.10
per unit
Estimated
sales price per $75.00 $67.50 $79.90
unit

In addition, you have also determined:

· All direct labour workers are paid a standard rate of $8 per hour
· Material X currently costs $2.50 per kilogram
· Material Y currently costs $6.00 per kilogram

Estimated fixed overheads for the upcoming year are as follows:

£’000
Heating and lighting 250
Rent and rates 375
Depreciation 180

Required:
Prepare a report to the Finance Director of BSN Limited, covering the
following issues:

a) The Finance Director has requested that you prepare briefing notes for
the production team at the Boston factory to explain the process of
break-even analysis. This should include a discussion of the different
types of cost behaviour, the relationship of contribution to costs, and
the concepts of the break-even point and the margin of safety, as well
 as the advantages and limitations of break-even analysis in practice.
(20 marks)

b) By determining the contribution per unit and the total contribution

received if:
i) only Product A is produced
ii) only Product B is produced
iii) only Product C is produced
Explain which product should be produced by BSN Limited (assuming
only one product will be produced)? (20 marks
c) Calculate the number of units that must be sold to break-even if:
i) only Product A is produced
ii) only Product B is produced
iii) only Product C is produced
Comment on the results of your analysis, including a discussion of the
margin of safety for each approach. (20 marks)

d) You have recently been informed that if the production line is modified
at a one-off fixed cost of £150,000, the existing machinery can be used
to produce all three products (with no change to the variable costs of
production). However, there is currently a national shortage of material
X. 300,000 kgs of material X are held within the Boston factory and are
available for production. You have been asked by the Finance Director
to determine (and explain) the production mix of products A, B and C
that will result in the maximum contribution and profit in the upcoming
year. Assume that no additional material X will be available for
purchase.
(30 marks)