Kunda Limited manufactures one standard product. Currently it is operating on a normal activity level of 70% with an output of 6,300 units, although he sales director believes that a realistic forecast for the next budget period would be at a level of activity of 50%.
| 60% | 70% | 80% | |
|---|---|---|---|
| Shs. | Shs. | Shs. | |
| Direct materials | 37,800 | 44,100 | 50,400 |
| Direct wages | 16,200 | 18,900 | 21,600 |
| Production overheads | 37,600 | 41,200 | 44,800 |
| Administration overheads | 31,500 | 31,500 | 31,500 |
| Selling and distribution overheads | 42,300 | 44,100 | 45,900 |
| Total cost | 165,400 | 179,800 | 194,200 |
Profit is 20% of selling price.
Required;
i. Prepare a flexible budget based on a 50% level of activity. (8 marks)
State two problems which may arise from such a change in the level of activity
(2 marks)