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QUESTION 1 KUMA makes three products X, Y, and Z. All three products must be offered...

QUESTION 1

KUMA makes three products X, Y, and Z. All three products must be offered for sale each month in order to provide a complete market service. The products are fragile and their quality deteriorates rapidly once they are manufactured.

The products are produced on two types of machine and worked on by a single grade of direct labour. Five direct employees are paid Ghc 8 per hour for a guaranteed minimum of 160 hours each per month.

All of the products are first molded on a machine type 1 and then finished and sealed on a machine type 2.

The machine hours requirements for each of the products are as follows.

Produce X Hours per unit

Machine type 1 1.5 Machine type 2 1.0

Product Y Hours per unit

4.5 2.5

Product Z Hours per unit

3.0 2.0

The capacity of the available machine type 1 and 2 are 600 hours and 500 hours per month respectively.

Details of the selling price, unit cost and monthly demand for the three products are as follows

Selling price

Component cost

Other direct material cost Direct labour cost at per hour Overheads

Profit

Maximum monthly demand units

91 22 23 6 24 16

120

Product H Ghc per unit

Product Y Ghc per unit

174

19

11

48

62

34

70

Product C Ghc per unit

140

16

14

36

52

22

60

Although KUMA uses marginal costing

making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost.

Required:

a. Calculate the machine utilization rate for each machine each month and explain which of the machine is the bottleneck/limiting factor

b. Using the current system of marginal costing and contribution analysis, calculate the

profit maximizing monthly output of the three products. (Total 15

Expert Solution

1)
	Produce H	Product Y	Product C	Total
Machine Hours Required = Hours per unit x Monthly Demand units
Machine type 1	180	315	180	675
Machine type 2	120	175	120	415
Machine Utilization Rate = Total machine hours required/ Total Capacity
Machine type 1 = 675/600	112.50%
Machine type 2 = 415/500	83.00%
Machine type 1 has the highest machine utilization rate and rate is above 100% so machine type 1 is the bottleneck/limiting factor .

2)
	Produce H	Product Y	Product C
Selling Price	$ 91.00	$ 174.00	$ 140.00
Less: Variable Cost	$ 51.00	$ 78.00	$ 66.00
Contribution Margin	$ 40.00	$ 96.00	$ 74.00
Machine type 1 hour	1.5	4.5	3
Contribution Margin per hour	$ 26.67	$ 21.33	$ 24.67
Ranking	1	3	2
Allocation of Machine Type 1 hours
	Units	Hours
Produce H	120	180
Product C	60	180
Hours Used		360
Product Y (600 - 360) = 240/4.5	53.33	240
Hours Used		600

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