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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

Solutions

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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