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preparation of profit statements and decision on further processing 610054

Preparation of profit statements and decision on further processing

(a) Polimur Ltd operates a process that produces three joint products, all in an unrefined condition. The operating results of the process for October 2000 are shown below:

Output from process:

Product A

100 tonnes

Product B

80 tonnes

Product C

80 tonnes

The month’s operating costs were £1 300 000. The closing stocks were 20 tonnes of A, 15 tonnes of B and 5 tonnes fo C. The value of the closing stock is calculated by apportioning costs according to weight of output.

Refining company at the following prices:

Product A

£5 per kg

Product B

£4 per kg

Product C

£9 per kg

Required:

Prepare an operating statement showing the relevant trading result for October 2000.

(b) The management of polimur Ltd have been considering a proposal to establish their refining operations.

The current market prices of the refined products are:

Product A

£17 per kg

Product B

£14 per kg

Product C

£20.50 per kg

The estimated unit costs of the refining operation are;

Product A (£ per kg)

Product B (£ per kg)

Product C (£ per kg)

Direct materials

0.50

0.75

2.50

Direct labour

2.00

3.00

4.00

Variable overheads

1.50

2.25

5.50

Prime costs would be variable. Fixed overheads, which would be £700 000 monthly, would be direct to the refining operation. Special equipment is required for refining product B an this would be rented at a cost, not included in the above figures, of £360 000 per month. It may be assumed that there would be no weight loss in the refining process and that the quantity refined each month would be similar to October’s output shown in (a) above.

Required:

Prepare a statement that will assist management to evaluate the proposal to commence refining operations. Include any further comments or observations you consider relevant.

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