In: Accounting
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.
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 |