Profit Maximization

MA – L2 – Q48 – Decision Making Techniques

Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

Question

Blue Horizon Industries Limited (BHIL) produces and markets three products viz. Alpha, Beta, and Gamma. Following information is available from BHIL’s records for the manufacture of each unit of these products:

	Alpha	Beta	Gamma
Selling price	GH₵ 66	GH₵ 106	GH₵ 124
Material-A (GH₵ 4 per kg)	GH₵ 8	GH₵ 12	GH₵ 12
Material-B (GH₵ 6 per kg)	GH₵ 12	GH₵ 24	GH₵ 24
Direct labour (GH₵ 10 per hour)	GH₵ 25	GH₵ 25	GH₵ 30
Variable overhead based on:
– Labour hours	GH₵ 1.8	GH₵ 1.5	GH₵ 1.8
– Machine hours	GH₵ 1.4	GH₵ 1.2	GH₵ 1.2
Total	GH₵ 3.2	GH₵ 2.7	GH₵ 3.0
Other data:
Machine hours	7	6	6
Maximum demand per month (units)	3,000	3,000	5,000

Additional information:
(i) BHIL is also engaged in the trading of a fourth product Zeta, which is very popular in the market and generates a positive contribution. BHIL currently purchases 600 units per month of Zeta from a supplier at a cost of GH₵ 40 per unit. In-house manufacture of Zeta would require: 2.5 kg of material-B, 1 hour of direct labour, and 2 machine hours.
(ii) Materials A and B are purchased from a single supplier who has restricted the supply of these materials to 22,000 kg and 34,000 kg per month respectively. This restriction is likely to continue for the next 8 months.
(iii) BHIL has recently accepted a Government order for the supply of 200 units of Alpha, 300 units of Beta, and 400 units of Gamma each month for the next 8 months. These quantities are in addition to the maximum demand stated above.
(iv) There is no beginning or ending inventory.

Required:
Determine whether BHIL should manufacture Zeta internally or continue to buy from the supplier during the next 8 months.

Answer

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Tags: Contribution Analysis, fixed costs, Government Order, Make or Buy, Manufacturing, Material Scarcity, Production Planning, Profit Maximization, Resource Constraints, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q47 – Decision Making Techniques

Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.

Question

An engineering company has been experiencing problems with restricted availability of resources. The company manufactures a variety of casings. It makes four types of casing. Each casing requires the same bought-in component and some high-grade steel. The standard costs for the four types of casing are as follows:

Casing	A	B	C	D
	GH₵	GH₵	GH₵	GH₵
Steel	250	500	190	390
Bought-in component	50	50	50	50
Direct labour	60	60	50	100
Variable production costs	40	50	40	50
Fixed production costs	180	240	150	270
Selling and administration costs	145	225	120	215
Profit	35	55	30	55
Selling price	760	1,180	630	1,130

All the selling and administration costs are fixed and the same single component is used for each of the four products. Direct labour is paid GH₵8 per standard hour and each member of the workforce is capable of producing any of the casings.
The company’s main customer has ordered 30 units of Casing A, 20 units of B, 30 units of C, and 20 units of D for production and delivery in the next month. Senior management have agreed that this order should be treated as a priority order and that these casings must be manufactured and delivered to the customer next month. This is necessary to maintain the goodwill of the customer. It is estimated that this order represents 10% of the total demand next month for each type of casing.
The company operates a just-in-time system, and has no inventories of steel, components, or finished goods.
Required:
If the aim is to maximise profit for the month, establish the production and selling plan for the company next month in the following situation:
(a) Situation 1. Supplies of steel are limited to GH₵250,000.

(b) Situation 2. Only 400 bought-in components are available from suppliers.

(d) Situation 4. A labour dispute restricts available productive labour hours in the month to 2,125; but the manufacture of any quantities of the four casings could be sub-contracted to an outside supplier. The cost of buying the casings externally would be GH₵475, GH₵705, GH₵380, and GH₵640 for Casing A, Casing B, Casing C, and Casing D respectively. In addition, it should be assumed that the major customer insists that its order is completed by the company itself and the manufacture should not be subcontracted.

Answer

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Tags: Contribution Analysis, fixed costs, Manufacturing, Priority Orders, Production Planning, Profit Maximization, Resource Constraints, Shortages, Steel Limitation, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

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

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Tags: contribution margin, fixed costs, Machine Hours, Manufacturing, Net profit, Optimal production, Product mix, Profit Maximization, Resource Allocation, variable costs
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

Question

Image Solutions Limited deals in various products. Relevant details of the products are as under:

	PW	PX	PY	PZ
Estimated annual demand (units)	5,000	10,000	7,000	8,000
Sales price per unit (GH¢)	150	180	140	175
Material consumption:
R (kg)	2	2.5	1.5	1.75
T (kg)	0.5	0.6	0.4	0.65
Labour hours	2	2.25	1.75	2.5
Variable overheads (based on labour cost)	75%	80%	100%	90%
Fixed overheads per unit (GH¢) (based on 80% capacity utilisation)	10	20	14	16
Machine hours required:
Processing machine hours	5	6	8	10
Packing machine hours	2	3	2	4

Company has a long term contract for purchase of material R and T at a price of GH¢ 15 and GH¢ 20 per kg respectively. Wage rate for 8 hours shift is GH¢ 200.

The estimated overheads given in the above table are exclusive of depreciation expenses. The company provides depreciation on number of hours used basis. The depreciation on each machine based on full capacity utilisation is as follows:

	Hours	GH¢
Processing machine	150,000	150,000
Packing machine	100,000	50,000

The company has launched an advertising campaign to promote the sale of its products. GH¢ 2 million have been spent on such campaign. This cost is allocated to the products on the basis of sale.

Required:
Compute the number of units of each product that the company should produce in order to maximize the profit and also compute the product wise and total contribution at optimal product mix.

Answer

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Tags: Capacity constraints, contribution margin, Cost analysis, Limiting Factors, Machine Hours, Product mix, Production Planning, Profit Maximization, Resource Allocation, variable costs
Level: Level 2

Topic: Decision making techniques, Relevant cost and revenue

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.

Answer

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Tags: Contract Obligations, Contribution Analysis, Labour Hours, Limiting Factors, Production Planning, Profit Maximization
Level: Level 2

Topic: Decision making techniques

MA – L2 – Q3 – Throughput Accounting

Calculate profit-maximizing output using marginal costing for two products with limited machine hours.

Question

A company based near the Blue River manufactures two products, Product A and Product B, on the same machines. Sales demand for the products exceeds the machine capacity of the company’s production department. The potential sales demand in each period is for 8,000 units of Product A and 12,000 units of Product B. Sales prices cannot be increased due to competition from other firms in the market. The maximum machine capacity in the production department is 32,000 hours in each period.
The following cost and profitability estimates have been prepared:

	Product A	Product B
Sales price	GH¢22	GH¢27
Direct materials	10	9
Direct labour and variable overhead	6	11
Contribution per unit	6	7
Machine hours per unit	1.5	2

Fixed costs in each period are GH¢90,000.
Required:
(a) Using marginal costing principles, calculate the profit-maximising output in each period, and calculate the amount of profit.

(b) Explain how throughput accounting differs from marginal costing in its approach to maximising profit.

(c) Use throughput accounting to calculate the throughput accounting ratio for Product A and for Product B. You should assume that the direct labour cost and variable overhead cost in your answer to part (a) is fixed in the short term.

(d) Using throughput accounting principles, calculate the profit-maximising output in each period, and calculate the amount of profit.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bottleneck Resource, Machine Hours, Marginal Costing, Profit Maximization, Throughput Accounting
Level: Level 2

Topic: Decision making techniques

Tag (SQ): Profit Maximization

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MA – L2 – Q48 – Decision Making Techniques

Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

MA – L2 – Q47 – Decision Making Techniques

Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.

MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

MA – L2 – Q42 – Decision Making Techniques

Determine optimal production mix for four liquids with a contract obligation, maximizing profit within labour hour constraints.

MA – L2 – Q3 – Throughput Accounting

Calculate profit-maximizing output using marginal costing for two products with limited machine hours.

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MA – L2 – Q48 – Decision Making Techniques

Determine if BHIL should manufacture Zeta internally or buy it, given material constraints and government orders.

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MA – L2 – Q47 – Decision Making Techniques

Establish production plan to maximize profit with steel limited to GH₵250,000, prioritizing a major customer's order.

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MA – L2 – Q46 – Decision making techniques

Compute Ouluto Limited's net profit for February 20X9 based on the optimum product mix, given resource constraints and cost data.

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MA – L2 – Q45 – Decision making techniques

Compute units of each product for Image Solutions to maximize profit and calculate contribution at optimal mix, considering machine hour constraints.

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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.

You're reporting an error for "MA – L2 – Q42 – Decision Making Techniques"

MA – L2 – Q3 – Throughput Accounting

Calculate profit-maximizing output using marginal costing for two products with limited machine hours.

You're reporting an error for "MA – L2 – Q3 – Throughput Accounting"

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