Tag (SQ): Contract Obligations
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MA – L2 – Q42 – Decision Making Techniques
Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.
Question
NexGen Ltd. manufactures four liquids: A, B, C, and D. The selling price and unit cost details for these products are as follows:
| Liquid A | Liquid B | Liquid C | Liquid D | |
|---|---|---|---|---|
| GH¢ per litre | GH¢ per litre | GH¢ per litre | GH¢ per litre | |
| Selling price | 100 | 120 | 120 | 110 |
| Costs: | ||||
| Direct materials | 24 | 30 | 21 | 18 |
| Direct labour (GH¢6/hour) | 18 | 15 | 24 | 12 |
| Direct expenses | 0 | 0 | 0 | 0 |
| Variable overhead | 12 | 10 | 18 | 12 |
| Fixed overhead (note 1) | 24 | 20 | 36 | 24 |
| Total cost per litre | 78 | 75 | 102 | 66 |
| Profit per litre | 22 | 35 | 18 | 44 |
Note 1: Fixed overhead is absorbed on the basis of labour hours, based on a budget of 1,600 hours per quarter (three months).
During the next three months, the number of direct labour hours is expected to be limited to 1,345 hours. The same labour is used for all products.
The marketing director has identified the maximum demand for each of the four products during the next three months as follows:
- Liquid A: 200 litres
- Liquid B: 150 litres
- Liquid C: 100 litres
- Liquid D: 120 litres
No inventories are held at the beginning of the period that could be used to satisfy demand in the period.
Required:
(i) Determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits.
(ii) Calculate the profit that this would yield.
(B) Suppose that a contract has been made before the beginning of the period by NexGen Ltd. and one of its customers, PrimeCorp. NexGen Ltd. has agreed to supply PrimeCorp with 20 litres of each A, B, C, and D during the three-month period.
This sales demand from PrimeCorp is included in the demand levels shown above in part (a) of the question.
Required:
(i) Given the contract with PrimeCorp, determine the number of litres of liquids A, B, C, and D to be produced and sold in the next three months in order to maximise profits, if the maximum number of labour hours remain 1,345 hours for the period.
(ii) Calculate the profit that this would yield.
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