Bottlenecks

F Co makes and sells two products, A and B, each of which passes through the same automated production operations. The following estimated information is available for period 1.

· Product unit data

· 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.

(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 profit.

(ii) Calculate the throughput accounting ratio for product B and comment on it.

(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.