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questions and answers, email theotherwomaninmarriage@gmail.com
Note: This is an Exam
Question and will be 15 marks.
CHOICE OF PRODUCT
WHERE LIMITING FACTOR EXIST
All companies limited in their
capacity, either for producing goods or providing services. There is always one resource that is most
restrictive (The Limiting Factor).
A limiting factor (principal budget factor) is a constraint
that limits the volume of output or activity level. Limiting factor may be in form of sales, demand, materials, labour,
capital, equipment, plant capacity etc.
A limiting factor is therefore
any factor that is in scarce supply and that stops the organization from
expanding its activities further, that is, it limits the organization’s
activities. Most limiting factor
problems can be solved in five steps;
i.
Identify the limiting factor in the problem
which may be any of limited capacity, scare material, labour hours etc.
ii.
Find the contribution per unit of each product
iii.
Divide the contribution of each product by the
quantity of limiting factor needed to produce one unit of the product.
iv.
Rank the products based on their contribution
per unit of limiting factor
v.
Schedule production according to the step (iv)
above.
ILLUSTRATION:
The Other Woman In Marriage
Company is able to produce four products and is planning its production mix for
the next period. Estimated cost, sales
and production data are given below:
BKT Zobo Kunu Shekpe
Selling Price/Unit 20 30 40 36
Direct Materials 6 18 10 12
Direct labour 6 4 14 10
RESOURCES/UNIT
Labour (hours) 3 2 7 5
Materials (kgs) 6 18 10 12
Maximum Demand (units) 5,000 5,000 5,000 5,000
Based on the above, what is the most appropriate
product mix under the following two assumptions?
(1) If
labour hours are limited to 60,000 in a period
(2) If
materials are limited to 120,000 kgs in a period
SOLUTION:
BKT Zobo Kunu Shekpe
Selling Price/Unit20 30 40 36
Less
Variable Cost:
Direct Materials (6) (18) (10) (12)
Direct labour (
6) ( 4) (14) (10)
Contribution: 8 8 16 14
Do you know how we got the contribution? If know,
the figures in bracket minus the selling price per unit. i.e. 20 – (6)(6) = 8. That is to say, add the figures in bracket
together, then minus them from the selling price.
The next step is to bring down the
contribution figures to continue the
workings.
8 8 16 14 3 2 7 5
=N2.67 = N4 =N2.29 =N2.8
Do you know how we got the figures 3, 2, 7, 5
above? If you don’t, we got them from the Labour hours in the question. Because, we are working on limiting factor of
the labour hours. The 8, 8, 16 and 14
figures are the ones we brought down from the contribution we calculated above.
Please, note that this explanation is to enable
your understanding. There should be no
such explanation when solving in exams.
You should do your workings directly and don’t stop and explain.
Now let’s continue from where we stopped:
The next stage is Ranking. By ranking, we would know the product to
produce first by ranking the one we highest figure as no 1, the next as no 2
and so on. So let bring down our
workings again.
8 8 16 14
3 2 7 5
=N2.67 = N4 =N2.29 =N2.8
Ranking: 3nd 1st 4th 2nd
Now we know the product to produce first from our
ranking, so let’s draw the production plan;
PRODUCTION
PLAN
Labour Our required:
Ranking: Product Demand Total Hours
1. Zobo 5,000 x 2 10,000
2. Shekpe 5,000 x 5 25,000
3. BKT 5,000 x 3 15,000
4. Kunu 5,000 x 7 35,000
Labour
our required: 85,000
The labour our required is 85,000 if we are to
produce all product with the demands from our customer but we have available
Labour Hours of 60,000. So we have to work with what we have.
Ranking: Product Demand Total Hours Balance Hours
1. Zobo 5,000 x 2 10,000 50,000
2. Shekpe 5,000 x 5 25,000 25,000
3. BKT 5,000 x 3 15,000 10,000
4. Kunu 1,429 x 7 10,000 -
For Kunu, we can’t produce all the 5,000
demanded. Reason why, we have 10,000
hours left for our use. So we have to do something like this:
10,000/7=1,429.
That is it.
With this explanation, task yourselves to work on materials – the part
(b) of the question. Everything is the
same. All you need to do is replace material figures
with labour hours figures and do your working from the stage of getting contribution.
Without all this long explanation, this is how your
working for the part (a) Labour Hours will look like below:
SOLUTION (A):
BKT Zobo Kunu Shekpe
Selling Price/Unit 20 30 40 36
Less
Variable Cost:
Direct Materials (6) (18) (10) (12)
Direct labour (
6) ( 4) (14) (10)
Contribution: 8 8 16 14
8
8 16 14 3 2 7 5
=N2.67 = N4 =N2.29 =N2.8
Ranking: 3nd 1st 4th 2nd
PRODUCTION
PLAN
Ranking: Product Demand Total Hours Balance Hours
1. Zobo 5,000 x 2 10,000 50,000
2. Shekpe 5,000 x 5 25,000 25,000
3. BKT 5,000 x 3 15,000 10,000
4. Kunu 1,429 x 7 10,000 -
10,000/7=1,429.
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