Unit 6 Dec 2003 paper

LIMITING FACTOR

INFORMATION[/………………………...….Alpha……….Beta………Gamma
Sales and production..(Units)………….1,000……….200………...500
Selling price per unit ……(SP)…………...£50………..£120……….£80
Direct Materials per unit (VC) ……….…£11……….£24…………£16

Direct Labour per Unit (Hrs)…(VC)……0.5 Hrs…..4 Hrs………1 Hrs
Direct Labour Rate per Hour ……………£6……….£6………….£6
Direct Labour Cost per Unit ……………..??...........??...............??

Fixed Monthly Overheads…..(£32,000)
Limiting Factor
Shortage of Direct Labour Hours. (Available 1,400 Hrs)

Calculate number of units of each range to make and sell to maximise profit for that month.

Step 1 Calculate contribution per Unit (SP-VC=Contribution)

…………………………………………..........…….……….Alpha……….Beta………G amma
.
Selling Price per unit …(£)..……………......………….50…………120………….80
Less Variable costs Material ……………....……….(11)………...(24)………...(16)
Less Variable Cost Labour (Lab Hrs x £6)…….…(..3)…………(24)………...(..6)
.
Contribution per Unit……(£)…………….......…………£36………..£72………….£58

Step 2 Calculate Contribution per Limiting Factor – Direct Labours in this case
.
……………………………………………….…...............…….Alpha……….Bet a………Gamma
Direct Labour per Unit (Hrs)…(VC)…….....…………0.5 Hrs……..4 Hrs………1 Hrs
Divide contribution per unit by Hrs per unit..……£72………….£18……..…..£58

Step 3 Rank products by best contribution per Limiting Factor
.
Rank…………………………………………................……….1………..……3… ...………….2
.
Step 4 Work out how many hours would be required to produce each product based on sales and production.
.
………………………………………………...........…….Alpha……….Beta………Ga mma
Sales and production..(Units)………………….1,000……….200………...500
Direct Labour per Unit (Hrs)…(VC)…………..…0.5 Hrs…..4 Hrs………1 Hrs
Total Hrs Required to produce …………………500 Hrs…..800Hrs…….500Hrs = 1800 Hrs

Step 5 Allocate Limited Resource to products accoutring to step 3 Ranking.

Hours Allocated for production….Rank 1 …....500Hrs
1400 hrs less 500 hrs = 900 Hrs Rank 2………………………………….500Hrs
900 hrs less 500 hrs = 400 Hrs Rank 3…………………400Hrs Remaining Hrs

Step 6 Work out How many units can be produced from remaining Labours Hrs.
………………………………………………….............….Alpha……….Beta……… Gamma
Sales and production..(Units)…………....……….1,000…………..………...50 0
Direct Labour per Unit (Hrs)…(VC)…………..…0.5 Hrs…..4 Hrs…….…1 Hrs
400 hours from rank 3 divide by 4 hrs equals………………100 units production only

Step 7 work out Total Contribution from Total production Possible.
…………………………………………………......….Alpha……….Beta………Ga mma
Sales and production..(Units)…………….1,000……….100………....500
Contribution per Unit……(£)……………………£36………..£72………….£58
.
(important Note – Only use Contribution per UNIT)
.
Total Contribution………………………………£3,600……£7,200…..£29,000.= £39,800

Step 8 Workout possible maximum profit.
.
Less Fixed Cost from Total Contribution…………………………………………..£32,000

Profit……………………………………………………………………………….............… …£7,800