Question on Bottlenecks

Topics: Marginal cost, Manufacturing, Bottleneck Pages: 3 (753 words) Published: May 7, 2013
5 Bottlenecks 36 mins

F Co makes and sells two products, A and B, each of which passes through the same automated production operations. The following estimated information is available for period 1.

Product unit data
A B
Direct material cost (\$) 2 40
Variable production overhead cost (\$) 28 4
Overall hours per product unit (hours) 0.25 0.15

������ Original estimates of production/sales of products A and B are 120,000 units and 45,000 units respectively. The selling prices per unit for A and B are \$60 and \$70 respectively. ������ Maximum demand for each product is 20% above the estimated sales levels. ������ Total fixed production overhead cost is \$1,470,000. This is absorbed by products A and B at an average rate per hour based on the estimated production levels. One of the production operations has a maximum capacity of 3,075 hours which has been identified as a bottleneck which limits the overall estimated production/sales of products A and B. The bottleneck hours required per product unit for products A and B are 0.02 and 0.015 respectively.

Required: (a) Calculate the mix (in units) of products A and B which will maximise net profit and the value (in \$) of the maximum net profit.(6 marks)

(b) F Co has now decided to determine the profit-maximising mix of products A and B based on the throughput accounting principle of maximising the throughput return per production hour of the bottleneck resource.

Given that the variable overhead cost, based on the value (in \$) which applies to the original estimated production/sales mix, is now considered to be fixed for the short/intermediate term: (i) Calculate the mix (of units) of products A and B which will maximise net profit and the value of that net profit. (8 marks)

(ii) Calculate the throughput accounting ratio for product B and comment on it. (3 marks) (iii) It is estimated that the direct material cost per...

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