- 15 Marks
MA – L2 – Q46 – Decision making techniques
Question
Ouluto Limited (OUL) is engaged in the manufacture and sale of three products viz. WBA, QPR and SC. The following information is available from OUL’s records for the month of February 20X9:
| WBA | QPR | SC | |
|---|---|---|---|
| Sales price per unit (GH₵) | 2,300 | 1,550 | 2,000 |
| Material cost per Kg. (GH₵) | 250 | 250 | 250 |
| Labour time per unit (Minutes) | 20 | 30 | 45 |
| Machine time per unit (Hours) | 4 | 2.5 | 3 |
| Net weight per unit of finished product (Kg.) | 6 | 4 | 5 |
| Yield (%) | 90 | 95 | 92 |
| Estimated demand (Units) | 10,000 | 20,000 | 9,000 |
Each worker is paid monthly wages of GH₵15,000 and works a total of 200 hours per month. OUL’s total overheads are estimated at 20% of the material cost.
Fixed overheads are estimated at GH₵5 million per month and are allocated to each product on the basis of machine hours. 100,000 machine hours are estimated to be available in February 20X9.
Required:
Based on optimum product mix, compute OUL’s net profit for the month of February 20X9.
Answer
Computation of net profit on the basis of optimum product mix:
| WBA | QPR | SC | |
|---|---|---|---|
| Selling price | 2,300 | 1,550 | 2,000 |
| Less: Variable costs | |||
| Direct Material | |||
| (250 × 6 / 0.9) | 1,666.67 | ||
| (250 × 4 / 0.95) | 1,052.63 | ||
| (250 × 5 / 0.92) | 1,358.70 | ||
| Direct Labour | |||
| [15,000 / 200 × (20 / 60)] | 25.00 | ||
| [15,000 / 200 × (30 / 60)] | 37.50 | ||
| [15,000 / 200 × (45 / 60)] | 56.25 | ||
| Variable Overheads | |||
| [1666.66 × 20% – (GH₵50 × 4 hrs)] | 133.33 | ||
| [1052.63 × 20% – (GH₵50 × 2.5 hrs)] | 85.53 | ||
| [1358.70 × 20% – (GH₵50 × 3 hrs)] | 121.74 | ||
| Total Variable cost | 1,825.00 | 1,175.66 | 1,536.69 |
| Contribution per unit | 475.00 | 374.34 | 463.31 |
| Machine hours required per unit | 4.0 | 2.5 | 3.0 |
| Contribution per machine hour | 118.75 | 149.74 | 154.44 |
| Ranking | 3 | 2 | 1 |
Now, the scarce hours will be allocated as per ranking.
| Product | Volume | Hours required | Hours used | Balance unused |
|---|---|---|---|---|
| 100,000 | ||||
| SC | 9,000 | 3.0 | 27,000 | 73,000 |
| QPR | 20,000 | 2.5 | 50,000 | 23,000 |
| WBA (Bal.) | 5,750 | 4.0 | 23,000 | 0 |
Profit arising from above production plan
| Product | Units | Contribution per unit | Contribution margin |
|---|---|---|---|
| SC | 9,000 | 463.31 | 4,169,790 |
| QPR | 20,000 | 374.34 | 7,486,800 |
| WBA | 5,750 | 475.00 | 2,731,250 |
| Total Contribution | 14,387,840 | ||
| Less: Fixed costs | (5,000,000) | ||
| Net Profit | 9,387,840 |
- Topic: Decision making techniques
- Uploader: Salamat Hamid