Calculating Total Contribution

When calculating the Total Contribution earned when doing Limiting Factors I finally thought I had got my head around it and thought that you calculated this by taking the volume of each product made and multiplying this by the contribution per unit NOT the contribution per limiting factor but when looking over June 2008 Exam Paper the answer is calculated by multiplying it BY THE CONTRIBUTION PER LIMITING FACTOR! Aaaaargh!

Advice anyone?

Comments

  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    YOUR STATEMENT IS CORRECT
    Total contribution =
    you calculated this by taking the volume of each product made and multiplying this by the contribution per unit

    Sales volume (units)...... 150,000 of A.............. 500,000 of B

    Contribution per unit...... £1.03/unit of A ...... £0.62 /unit of B
    Sandy
    [email protected]
    www.sandyhood.com
  • jewels.p
    jewels.p Registered Posts: 1,774
    SandyHood wrote: »
    YOUR STATEMENT IS CORRECT
    Total contribution =


    Sales volume (units)...... 150,000 of A.............. 500,000 of B

    Contribution per unit...... £1.03/unit of A ...... £0.62 /unit of B

    Where do you get the 150000 of A and the 500,000 of B figures from? I tried multiplying the Machine Hours per Unit by the Machine Hours allocated as I thought this would give me the amount of Units but that gave me 6000.

    When I tried to figure out where I went wrong with the Total Contribution earned I tried multiplying the Contribution per Machine Hour (Limiting Factor) by the Machine Hours allocated and it gave me the right answer. This is totally confusing me now!

    Thanks again
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    I'm sure you started the production mix calculation by focussing on the 70,000 machine hours.
    And then recognised that the contribution per machine hour would be the way of sharing out the 70,000 hours to maximise total profit.

    So A will earn £1.03 per unit and as 0.20 hours are needed per unit, so each machine hour used for prioducing As. This is £5.15 per machine hour.

    B earns £0.62 per unit (but a lot more can be made from every machine hour) so B production earns £7.75 per machine hour.

    On this basis we would rather produce Bs than As. But task 2.2 tells us that we can't sell more than 500,000. So allocate 0.08 x 500,000 machine hours to B production. (40,000 hours)

    There are 30,000 hours left. We'll use that for A production.

    As each A requires 0.2 hours the 30,000 hours enables us to produce 150,000 units of A
    As each B requires 0.08 hours the 40,000 hours enable us to produce 500,000 units of B.
    Sandy
    [email protected]
    www.sandyhood.com
  • jewels.p
    jewels.p Registered Posts: 1,774
    SandyHood wrote: »
    I'm sure you started the production mix calculation by focussing on the 70,000 machine hours.
    And then recognised that the contribution per machine hour would be the way of sharing out the 70,000 hours to maximise total profit.

    So A will earn £1.03 per unit and as 0.20 hours are needed per unit, so each machine hour used for prioducing As. This is £5.15 per machine hour.

    B earns £0.62 per unit (but a lot more can be made from every machine hour) so B production earns £7.75 per machine hour.

    On this basis we would rather produce Bs than As. But task 2.2 tells us that we can't sell more than 500,000. So allocate 0.08 x 500,000 machine hours to B production. (40,000 hours)

    There are 30,000 hours left. We'll use that for A production.

    As each A requires 0.2 hours the 30,000 hours enables us to produce 150,000 units of A
    As each B requires 0.08 hours the 40,000 hours enable us to produce 500,000 units of B.


    I think I understand but am I correct in thinking that when doing the Total Contribution you get the right answer by multiplying the Total Limiting Factor by the Contribution per Limiting Factor?
    Sorry to be a pain.
    Thanks
    Julie
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    Julie
    When you wrote:
    Take the volume of each product made and multiply this by the contribution per unit NOT the contribution per limiting factor
    You were right

    This is not so useful
    multiplying the Total Limiting Factor by the Contribution per Limiting Factor
    Sandy
    [email protected]
    www.sandyhood.com
  • SandyHood
    SandyHood Registered, Moderator Posts: 2,034
    There may be some forumites who can see the arithmetical similarity of say
    hours allocated x contribution per hour

    But (in the hope of staving off such comments) this ignores whether the output is in whole products

    So stick with
    units to be produced x contribution per unit
    Sandy
    [email protected]
    www.sandyhood.com
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