Peter Ltd makes 3 products that must be offered for sale each month to complete market service. The products are fragile and deteriorate quickly shortly after production. They are produced on two types of machines and worked on a single grade of direct labour. 50 direct employees are paid $8 per hour for a guaranteed minimum of 160 hrs per month. All the products are first pasteurised on a machine A and then finished and sealed on a Machine type B The machine hours required for each of the products are as follows: Soya (hrs per unit) Milco (hrs per unit) Yoghurt (hrs per unit) Machine Type A 1.5 4.5 3 Machine Type B 1.0 2.5 2 The capacity of the available machines type A and B are 6000 hours and 5000 hours per month respectively. The selling prices, unit costs and monthly demand for the 3 products are as follows: Soya ($per unit) Milco( $ per unit) Yogurt ($ per unit) Selling price 910 1740 1400 Concentrate cost 220 190 160 Other direct materials 230 110 140 Direct labour cost @ $8 per hr 60 480 360 Overheads 240 620 520 Profit 160 340 220 Maximum monthly demand (units) 1200 700 600 Although Richard uses marginal costing and contribution analysis as a basis for decision making, profits are reported in the monthly management accounts using absorption costing basis. Finished goods inventories are valued in the monthly management accounts as full absorption cost. a) calculate the monthly machine utilisation rate for each product and explain which machine is the bottleneck / limiting factor. b) Use current system marginal costing and contribution analysis to calculate the profit maximising monthly output of the 3 products. c)Use a throughput approach to calculate the throughput- maximising monthly output of the 3 products and explain the throughput accounting approach to optimising the level of inventory and its valuation. Contrast this approach to the current system Peter is using
Peter Ltd makes 3 products that must be offered for sale each month to complete market service. The products are fragile and deteriorate quickly shortly after production. They are produced on two types of machines and worked on a single grade of direct labour. 50 direct employees are paid $8 per hour for a guaranteed minimum of 160 hrs per month.
All the products are first pasteurised on a machine A and then finished and sealed on a Machine type B
The machine hours required for each of the products are as follows:
| Soya (hrs per unit) | Milco (hrs per unit) |
Yoghurt (hrs per unit) |
|
| Machine Type A | 1.5 | 4.5 | 3 |
| Machine Type B | 1.0 | 2.5 | 2 |
The capacity of the available machines type A and B are 6000 hours and 5000 hours per month respectively. The selling prices, unit costs and monthly demand for the 3 products are as follows:
| Soya ($per unit) | Milco( $ per unit) | Yogurt ($ per unit) | |
| Selling price | 910 | 1740 | 1400 |
| Concentrate cost | 220 | 190 | 160 |
| Other direct materials | 230 | 110 | 140 |
| Direct labour cost @ $8 per hr | 60 | 480 | 360 |
| Overheads | 240 | 620 | 520 |
| Profit | 160 | 340 |
220 |
| Maximum monthly demand (units) | 1200 | 700 |
600 |
Although Richard uses marginal costing and contribution analysis as a basis for decision making, profits are reported in the monthly
a) calculate the monthly machine utilisation rate for each product and explain which machine is the bottleneck / limiting factor.
b) Use current system marginal costing and contribution analysis to calculate the profit maximising monthly output of the 3 products.
c)Use a throughput approach to calculate the throughput- maximising monthly output of the 3 products and explain the throughput accounting approach to optimising the level of inventory and its valuation. Contrast this approach to the current system Peter is using
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