Elegant Enterprises plc is currently operating at 80% of its machine capacity in the manufacture of three different types of chair. The following information for each product is available for the year ended Year 1

1. Elegant Enterprises plc is currently operating at 80% of its machine capacity in themanufacture of three different types of chair. The following information for eachproduct is available for the year ended Year 1.Unit Information Basic Delux Super DeluxSelling Price £150 £200 £260Variable Costs– Materials £60 £80 £110– Labour £40 £60 £80– Variable Overheads ? ? ?Machine Hours 2 hrs 5 hrs 5 hrsUnits Produced 5000 5500 6500Variable overheads are charged to each product at the rate of £5 per machine hour.Fixed costs are currently £450,000.(a) Using the above information, calculate:(i) the total number of machine hours currently being used by ElegantEnterprises plc in Year 1;(ii) the total profit being earned by Elegant Enterprises plc at the current levelof production.In Year 2 Elegant Enterprises plc will work at full machine capacity and it isanticipated that the demand for each of the 3 products will be:Basic – 6,500 unitsDelux – 7,500 unitsSuper Delux – 8,000 unitsFixed costs will rise by 20%.(b) Using the information for Year 2, calculate:(i) the number of machine hours available at full capacity;(ii) the quantity of each product to be produced at full capacity if profits areto be maximised;(iii) Total Profit.
At the start of Year 3 Elegant Enterprises plc plans to introduce a new product calledUltimate Delux. The company will invest in new machinery, which will increase totalmachine capacity by 20%. Fixed costs will rise by a further £45,000. Variableoverheads will be recovered at the same rate as in the previous 2 years. Theinformation per unit is as follows.Selling Price £300Material Cost £175Labour £60Machine hours 5 hoursDemand for the new product, Ultimate Delux will be 5,500 units, while the demandfor the other 3 products will remain the same as in Year 2.(c) Calculate the maximum possible profit that could be earned during Year 3 byElegant Enterprises and advise the company whether or not it should introducethe new product.(d) During Year 4, a special order of 2,000 units of Ultimate Delux at a reduced priceof £280 per unit is being considered. The factory will continue working at fullcapacity and demand for the company’s products will remain the same asbefore. All other costs and prices remain unchanged. Calculate the new profitand advise whether or not the special order should be accepted.(e) Explain the meaning of the term opportunity cost.

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