Question on Bottlenecks Essay

Bottlenecks 36 mins F Co makes and sells two products, A and B, each of which passes through the same automated production operations - Question on Bottlenecks Essay introduction. The following estimated information is available for period 1. Product unit data A B Direct material cost ($) 2 40 Variable production overhead cost ($) 28 4 Overall hours per product unit (hours) 0. 25 0. 15 ?????? Original estimates of production/sales of products A and B are 120,000 units and 45,000 units respectively. The selling prices per unit for A and B are $60 and $70 respectively. ?????? Maximum demand for each product is 20% above the estimated sales levels. ????? Total fixed production overhead cost is $1,470,000. This is absorbed by products A and B at an average rate per hour based on the estimated production levels. One of the production operations has a maximum capacity of 3,075 hours which has been identified as a bottleneck which limits the overall estimated production/sales of products A and B. The bottleneck hours required per product unit for products A and B are 0. 02 and 0. 015 respectively. Required: (a) Calculate the mix (in units) of products A and B which will maximise net profit and the value (in $) of the maximum net profit. 6 marks) (b) F

Co has now decided to determine the profit-maximising mix of products A and B based on the throughput accounting principle of maximising the throughput return per production hour of the bottleneck resource. Given that the variable overhead cost, based on the value (in $) which applies to the original estimated production/sales mix, is now considered to be fixed for the short/intermediate term: (i) Calculate the mix (of units) of products A and B which will maximise net profit and the value of that net rofit. (8 marks) (ii) Calculate the throughput accounting ratio for product B and comment on it. (3 marks) (iii) It is estimated that the direct material cost per unit of product B may increase by 20% due to shortage of supply. Calculate the revised throughput accounting ratio for product B and comment on it. (3 marks) (Total = 20 marks) 6 HYC 36 mins HYC makes three products H, Y and C. All three products must be offered for sale each month in order to be able to provide a complete market service.

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The products are fragile and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machine and worked on by a single grade of direct labour. Five direct employees are paid $8 per hour for a guaranteed minimum of 160 hours each per month. All of the products are first moulded on a machine type 1 and then finished and sealed on a machine type 2. The machine hour requirements for each of the products are as follows. Product H Product Y Product C Hours per unit Hours per unit Hours per unit

Machine type 1 1. 5 4. 5 3. 0 Machine type 2 1. 0 2. 5 2. 0 The capacity of the available machines type 1 and 2 are 600 hours and 500 hours per month respectively. Details of the selling prices, unit costs and monthly demand for the three products are as follows. Product H Product Y Product C $ per unit $ per unit $ per unit Selling price 91 174 140 Component cost 22 19 16 Other direct material cost 23 11 14 Direct labour cost at $8 per hour 6 48 36 Overheads 24 62 52 Profit 16 34 22 Maximum monthly demand (units) 120 70 60

Although HYC uses marginal costing and contribution analysis as the basis for its decision making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost. Required 🙁 a) Calculate the machine utilisation rate for each machine each month and explain which of the machines is the bottleneck/limiting factor. (4 marks) (b) Using the current system of marginal costing and contribution analysis, calculate the profit maximising monthly output of the three products. 4 marks) (c) Explain why throughput accounting might provide more relevant information in HYC’s circumstances. (4 marks) (d) Using a throughput approach, calculate the throughput-maximising monthly output of the three products. (4 marks) (e) Explain the throughput accounting approach to optimising the level of inventory and its valuation. Contrast this approach to the current system employed by HYC. (4 marks) (Total = 20 marks)

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