Choice of a product where a shortage exists: Limiting Factor
This refers to the situation where a company produces several products, but there is a shortage or single binding constraint. Such a constraint prohibits further profits being made, and may be, for example, sales, availability of skilled labour or availability of materials that may be in short supply.
In such circumstances, consideration should be given to maximising the contribution per unit of scarce resource consumed.
The following information is provided relating to the anticipated demand and the productive capacity for the next quarter in respect of three components that are manufactured within the ...view middle of the document...
The variable costs for each product are as follows:
Direct Materials 2 6
Direct Labour (€3 per hour) 12 6
Variable Overhead 2 2
Total Variable Cost 16 14
Hugh Geraghty is concerned to ensure that MCG Ltd optimises the use of the skilled labour available during November 2011.
Assume that the opening and closing inventories of work in progress and finished goods for the month of November 2011 are nil.
a) Prepare a note for Hugh Geraghty that explains the term Limiting Factor
b) Calculate the expected shortfall in the number of direct labour hours for November 2011.
c) Advise on the contribution maximising production mix of Alpha and Beta for the month of November 2011.
d) Briefly comment on the problems which may arise as a result of MCG Ltd not being able to satisfy demand.
e) Briefly describe the following cost behaviours and give real life examples of each of the following:
• Step costs
• Mixed costs
BVX Limited manufactures three garden furniture products - chairs, benches and tables.
The budgeted unit cost and resource requirements of each of these items is detailed below:
Chair Bench Table
(€) (€) (€)
Timber cost 5.00 15.00 10.00
Direct labour cost 4.00 10.00 8.00
Variable overhead cost 3.00 7.50 6.00
Fixed overhead cost 4.50 11.25 9.00
Total Cost 16.50 43.75 33.00
Budgeted volumes per annum 4000 2000 1500
These volumes are believed to equal the market demand for these products.
The fixed overhead costs are attributed to the three products on the basis of direct labour hours.
The labour rate is €4.00 per hour.
The cost of timber is €2.00 per square metre
The products are made from a specialist timber.
A memo from the purchasing manager advises you that because of a problem with the supplier it is to be assumed that this specialist timber is limited in supply to 20 000 square metres per annum.
The sales director has already accepted an order for 500 chairs, 100 benches and 150 tables, which if not supplied would incur a financial penalty of €2000. These quantities are included in the market demand estimates above.
The selling prices of the three products are
(a) Determine the optimum production plan and state the net profit that this should yield per annum.
(b) Calculate and explain the maximum prices which should be paid per sq. metre in order to obtain extra supplies of the timber.
(c) The management team has accused the accountant of using too much jargon.
Prepare a statement which explains the following terms in a way that a multidisciplinary team of managers would understand.
The accountant will use this statement as a briefing paper at the next...