Question Tag: Resource Optimization

The Managing Director of NTAMS Manufacturing Company Limited, located in Lagos, attended a seminar titled “Optimizing scarce resource utility in a manufacturing setting with particular reference to linear programming.” Upon his return, he initiated a management meeting to discuss key insights, prompted by the board’s decision to prioritize two primary products.

The following are cost data for the anticipated products “Biggi” and “Smalli”:

The company adheres to a pricing policy where total cost of production is marked up by 20%. Annual overhead is ₦10,000,000, allocated on a 3:2 basis between Biggi and Smalli, with a projected production of 200,000 Biggis and 100,000 Smallis.

Available resources for the upcoming year:

• Materials: 1,800,000 kg
• Machine Time: 800,000 hours
• Other Processing Time: 1,400,000 hours

Required:

As the management accountant:

1. Explain briefly the concept of linear programming and its usefulness.
   (5 Marks)
2. Compute the Prices for Biggi and Smalli using the company’s pricing policy.
   (5 Marks)
3. Advise the company on the output levels needed to maximize total profit, with full financial analysis support.
   (10 Marks)
4. Explain the meaning and limitations of “shadow prices” and calculate them for constraints.
   (12 Marks)
5. Assuming consistent conditions for three years with an investment cost of ₦45,000,000 and a 15% cost of capital:
   • Determine if this venture is justified.
     (4 Marks)
   • Find the breakeven discount factor for this project.
     (4 Marks)