need task 2 only ( $ 5)

CASE: FRAICH INTERNATIONAL In the early 1960s, S. Fraich established his own production company in the northern part of a small railway-station town. This marked the beginning of 24 years of steady success. Naturally, his son J. Fraich became involved in the company, FRAICH INTERNATIONAL (FI), after completing his Graduate Diploma in Business Administration. Over the following years, the company came closer to using full capacity. FI had difficulties meeting the growing demand for its products in a satisfactory manner. Therefore, Fraich Jr. was given the important task of restoring the family's reputation for short and precise delivery times. Fraich Jr. solved the task by expanding the production capacity at a site in the southern part of town. The company now even has capacity for new tasks. FI produces three primary products: UN, DEUX and TROIS – all exceptionally designed with an international appeal. The three products are sold to an established customer base on the European market. For a number of years, FI has used flexible budgets and standardized accounting on the principle of full allocation of production costs. Information about standards for materials and direct hours is given in Annex 1. In the spring of 2003 the company received a positive letter from HEIPLEIM, one of the leading companies in Central Europe, concerning a 2002-production of 2,000 units of the product QUATRE. HEIPLEIM wishes to strengthen the cooperation between the two companies with a extra standing order for 50,000 units of QUATRE per year. HEIPLEIM did, however, state a condition for the order in that the order was the be assembled at a subcontractor who was to guarantee the entire production. In return HEIPLEIM offers an amount as compensation for all FI "handling costs" incurred by accepting the order, based on actual consumption and the capacity tied up at no cost to FI. Father and son decide to examine the implications of this “either-or offer” by setting up a Plan and Budget for the financial year from 1 July 2003 to 30 June 2004. The budget is to be based on annual accounts principles. According to Fraich Sr., the budget must show a return on equity of at least 25% before tax. An initial first-time test production of QUATRE was made and this yielded the following data that may be used to assess the implications of future production of the product: 2 units of item 101 and 5 units of item 104 at DKK 18 per unit were used for each product. The Production Department South had established a working time of l.0 hour per finished product unit and Assembly Department South established a working time of 1.5 hour per finished product unit. The well-reputed Central European contractor therefore quoted a price per unit corresponding to these data plus a supplement that equals FI's usual formula for the full allocation of indirect and variable production costs as well as a surcharge of l0% on the direct materials. In one of his previous jobs Fraich Jr. had analysed second time productions and defined the concept of learning rate as the average time spent directly on the second time production divided by the average direct time consumption for the first time production. With these previous analysis results in mind Fraich Jr. estimates the learning rate for the order on 50.000 units to 80 percent, which is used in assessing QUATRE. Based on economic forecasts and overviews of sales and inventory in 2002/03 the following preliminary budget figures for 2003/04 are compiled: UN DEUX TROIS Expected sales in 2003/04 (units) 44.600 32.400 24.000 Requirements for the increase in stocks (units) 1.000 0 0 Selling price in 2003/04 (DKK per unit) 720 620