Blue Company produces three models of ladies handbags. The first model has a trade name calledSmarty. The Company’s normal production and marketing…

Blue Company produces three models of ladies handbags. The first model has a trade name calledSmarty. The Company’s normal production and marketing capacity of the model Smarty is 80,000 units.The selling price per unit of this model is 200 AED. The following table shows the cost items and theproduction levels for the last four months of the current year. Amounts are in dirhams exceptproduction levelMonth February March April MayProduction Level (units) 10,000 15,000 20,000 25,000Leather used for the bags 500,000 750,000 1,000,000 1,250,000Wages of workers on the assembly line 600,000 900,000 1.200,000 1,500,000Depreciation of cutting & sewing machines 1,000,000 1,000,000 1,000,000 1,000,000Lining material for the bag’s inside 300,000 450,000 600,000 750,000Machine repairs and maintenance 600,000 700,000 800,000 900,000Production supervisor’s Salary 50,000 50,000 50,000 50,000Factory rent and Insurance 100,000 100,000 100,000 100,000Allocated share of administrative expenses 200,000 200,000 200,000 200,000Allocated share of general expenses (e.g., cleaning andsecurity)50,000 50,000 50,000 50,000At the monthly meeting of top Management for planning and control, the need for expanding andpenetrating the product market were discussed and specific questions were raised. The following aresome of these questions:1. What is the cost function of model Smarty and how it relates to its current selling price? 4 marks2. How much is the product cost for Smarty in April and how much is the period cost? One mark3. What is the total contribution margin for the month of April? To what extent do you considerthis contribution margin to be suitable? One mark4. How many units of Smarty would represent the break-even point? One mark5. If the Company plans to produce and sell 40,000 handbags of the model Smarty in June, whatwould be the expected total costs and the contribution margin? What is needed to be done toimprove the financial results each month? 2 matks6. Assume the Company is planning to make monthly profit of AED 600,000 starting the month ofSeptember, how many units of Smarty would the company need to make and sell to achieve thisdesired profit? One markMr. Sultan, the Company’s controller indicated that the Company’s records contain the basicinformation to answer the questions raised. He promised to prepare and distribute a report to themembers the next day that would address the above questions with some additional comments of hisown on the points raised. Assume you are the controller; prepare the required report with supportingnumbers
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