Ulfa Ltd produces a single product in its plant. This product sells for $ 100 per unit.

| March 31, 2017

Ulfa Ltd produces a single product in its plant. This product sells for $ 100 per unit. The standard production cost per unit is as follows:
Raw materials (5 kgs @ $ 80) $ 40
Direct labour (2 hours @ $ 5)10
Variable manufacturing overheads10
Fixed manufacturing overheads20
80
The plant is currently operating at full capacity of 1, 00,000 units per years on a single shift. This output is inadequate to meet the projected sales manager has estimated that the firm will lose sales of 40,000 units next years if the capacity is not expanded
Plant capacity could be doubled by adding a second shift. This would require additional out-of-pocket fixed manufacturing overhead costs of
$ 10,00,000 annually. Also, a night work wage premium equal to 25 per cent of the standard wage would have to be paid during the second shift. However, if annual production volume were 1,30,000 units or more, the company could take advantage of 2 per cent quantity discount on its raw material purchases.
You are required to advise whether it would be profitable to add the second shift in order to obtain the sales volume of 40,000 units per year?

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