Question

In: Accounting

Product details are as follows: Product P Q R S Selling price (£/unit) 42.00 57.00 54.60...

Product details are as follows:

Product P Q R S
Selling price (£/unit) 42.00 57.00 54.60
Material T1 (Kg/unit) 4 6 6
Material T2 (Kg/unit) 4 4.4 3.2 6
Direct labour (hours/unit) 1.2 2.4 3 3.4
Variable production overheads (£/unit) 2.20 2.60 2.20 2.80
Fixed production overheads (£/unit) 3.00 3.20 3.40 2.80
Expected demand for next month (units)         1,900         2,000         1,800

Products P, Q and R are sold to customers, while Product S is a component used in the manufacture of the other products.

Material T1 is expected to be in short supply next month. The company has received a delivery of 22,000 kilos of T1 which is expected to be in stock at the start of next month.The company cannot get further supplies unless it pays a premium price. The normal market price for T1 is £2.50 per Kg.

T2 costs £3.00 per Kg and direct labour is paid £4.00 per hour.

Required: Determine the optimum production schedule on the assumption that no additional purchases are made.

Solutions

Expert Solution

Particulars P Q R Total
Demand 1900 2000 1800
Material T1 required kgs to fulfill the demand 7600 12000 10800 30400
Material T1 available 22000
Shortage 8400

There is a shortga of 8400 kgs of Material T1. so, contribution per Material kgs need to be calculated for deciding optimal contribution.

Calculation of Contribution per Material T1:

Particulars P Q R
Selling price per unit 42 57 54.6
Less - Variable costs
Material T1 10 15 15
Material T2 12 13.2 9.6
Direct Labour Cost 4.8 9.6 12
Variable OH 2.2 2.6 2.2
Total Variable costs 29 40.4 38.8
Contribution Per unit 13 16.6 15.8
Materials kgs/unit 4 6 6
Contribution per Materials T1 3.25 2.77 2.63

So, we should produce Product P first as it has highest contribution per material kgs. Then, we should produce Product Q,then Product R

Optimum Production Schedule:

Particulars P Q R Total
Annual Demand 1900 2000 1800 5700
Material T1 (Kg/unit) 4 6 6
Material T1 required for demand 7600 12000 10800 30400
Material T1 to be used 7600 12000 2400 22000
Production as per the usage of Material T1 1900 2000 400 4300

ekkarill92 answered 1 year ago
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