Question 3

Global Tyres Limited manufactures three types of tyres; Premium, Standard and Budget brands. The maximum market demand and resource requirements of each of these products are shown below:

The tyres are made from an advanced slip-resistant material that gives the firm a competitive advantage. Global Tyres has established an export requirement in country B that will result in massive growth. However, an email from the purchasing manager has informed you that the supplier expects that the year’s supply of this special material is limited to 251,000 mitres.

Global Tyres Limited does not keep any inventory. Without the board of directors’ sanction, the sales director has already accepted an order for 1,000 Standard Tyres that, if not fulfilled, would incur a financial penalty of £30,000. This order is included in the Standard Tyres’ maximum market demand figure.

Global Tyres Limited’s directors need to know whether they should first satisfy the contract and then prioritise production in the normal way or whether it should consider breaching the contract and incurring the penalty.

Required:

2.1.         Prepare the following workings, analysed by product, based on the above information:

2.1.2. Calculate fixed and variable overheads using the high/low method.

2.1.3. Marginal cost card showing selling price, variable costs, and contribution per unit for each product.

2.1.4. Contribution per unit of scarce resource and your decision for ranking the product to be produced first based on the highest contribution.

2.2. Prepare a budgeted production schedule and a marginal cost income statement (analysed by product) for the year 2022 assuming that the Standard Tyres contract is honoured.

2.3. Prepare budgeted production schedule and a marginal cost income statement (analysed by product) for the first half of 2021 assuming that the Standard Tyres contract is not honoured.

2.4. Advise Global Tyres Limited’s directors if they should honour or not honour the Standard Tyres contract.