Essay Preview: Mis
Report this essay
COST AND MANAGEMENT ACCOUNTING
QUESTION 1
Wen Ltd produces three types of products, Silky, Dryee and Oilie.
All products are made from the same material Sulfate and use the same grade of workers and factory resources to produce them. The following information is available on each of the products:
Silky
Dryee
Oilie
Sulfate (grams)
Bottle (container cost)
$0.05
$0.10
$0.15
Direct labour (hrs)
The material Sulfam costs $0.10 per gram and direct labour is paid at $15 per hour. Variable factory overheads are absorbed at two thirds of the direct labour cost.
Fixed overhead for the year relating to production is estimated at $40,500.
For the year 2006, it is expected the following to be sold:
Silky 9,980, Dryee 7,500 and Oilie 5,000.
The selling price per bottle of each type of product is expected to be:
Silky $14.00, Dryee $15.80 and Oilee $22.65
It is expected that in the year 2006, supplies of Sulfate will be limited to a total of 1 million grams of sulfate, as there is a shortage of supply from the local suppliers due to the high demand.
Required:
Assume that no alternative supplies of sulphate can be located in 2006 and a minimum of 2,500 bottles of each product must be produced during the year to meet the contracts already signed, calculate the number of bottles of each product that should be produced in order to maximise profit and state the amount of this profit.
Optimum production schedule
Silky
Dryee
Oilie
Selling price
14.00
15.80
22.65
Variable material
Variable labor
Variable overhead
Total Variable cost
13.35
20.65
Contribution per bottle
Grams
Contribution per gram
0.054
0.035
0.025
Variable material
Silk =50 X 0.1 + 0.05 = 5.05
Dryee =70 X 0.1 + 0.10 = 7.1
Oilie = 80 X 0.1 + 0.15 = 8.15
Variable Labor
Silky = 15 X 0.25 = 3.75
Dryee = 15 X 0.25 = 3.75
Oilie = 15 X 0.50 = 7.5
Variable overhead
Silky = 3.75 X 2/3 = 2.5
Dryee = 3.75 X 2/3 = 2.5
Oilie = 7.5 X 2/3 = 5
Contribution per bottle
Silky = 14.00 ÐC 11.3 = 2.7
Dryee = 15.80 ÐC 13.35 = 2.45
Oilie = 22.65 ÐC 20.65 = 2.00
Contribution per gram
Silky = 27/50 = 0.054
Dryee = 2.45/70 = 0.035
Oilie = 2.00/80 = 0.025
Grams for minimum production
Silky = 50 X 2,500 = 125,000
Dryee = 70 X 2,500 = 175,000
Oilie = 80 X 2,500 = 200,000
Total gram ÐC grams for minimum production
= 1,000,000 ÐC (125,000 ÐC 175,000 ÐC 200,000)
= 1,000,000 ÐC 500,000
= 500,000
Silky
50 X (9,980 ÐC 2,500) = 374,000
500,000 ÐC 374,000 = 126,000
Dryee
70 X (7,500 ÐC 2,500) = 350,000
350,000 > 126,000
126,000/70 = 1,800
Total contribution
= 2.7 X 9,980 + 2.45 X (2,500 + 1,800) + 2.00 X 2,500
= 26,946 + 10,535 + 5,000
= 42,481
Net profit = Total contribution ÐC Fixed overhead
= 42,481 ÐC 40,500
= 1,981
Bottle of Dryee = 2,500 + 1,800 = 4,300
The number of bottles of Silky that should be produced is 9,980.
The number of bottles of Dryee that should be produced is 4,300.
The number of bottles of Oilie that should be produced is 2,500.
The amount of the maximize profit is $1,981.
Assume that there is no limitation on the supply of sulphate and that there is no requirement to produce 2,500 bottles of each product but the direct labour is limited to 6,000 hours in 2006.
Calculate the number of bottles of each product that should be produced for the year and the maximum profit arising from this production level.
Optimum production schedule
Silky
Dryee
Oilie
Selling price
14.00
15.80
22.65
Variable material
Variable labor
Variable overhead