Requirements:

Managing Constrained Resources

DLH to
Unit
Demand Direct DLH per CM per produce
Product Selling
(units) Materials unit DLH Projected
Price
Sales
Classics 75,000 ₱420 ₱153.50 0.65 126.9 48,750.00
Layers 42,000 490 200.5 0.85 174.5 35,700.00
Extraaz 40,000 750 188 0.8 442.0 32,000.00
Ruby 35,000 450 287.7 1.2 70.6 42,000.00
Divine 50,000 540 160.6 0.7 247.3 35,000.00
Total         1,061.28 193,450.00

The significance of the contribution margin per direct labor hour is that it helps in
identifying which products are more profitable in terms of the direct labor hours expended in
their production. It can be used to make informed decisions on resource allocation and
production prioritization.

The significance of calculating the total direct labor hours for projected sales is to
understand the resource requirements for meeting the estimated demand for each product. It
helps in planning production capacity and resource allocation.

The highest price, in terms of a rate per hour, that Nestle would be willing to pay for
additional capacity (added direct labor time) can be calculated based on the contribution margin
per direct labor hour of the most profitable product. The rationale behind this is that Nestle
would be willing to pay up to the amount that they can still generate a positive contribution
margin after accounting for the additional labor cost.
 To calculate the highest price, Nestle would compare the contribution margin per direct
labor hour of the most profitable product with the additional labor cost per hour. If the
contribution margin per direct labor hour is higher than the additional labor cost per hour, then
Nestle would be willing to pay up to the amount of the contribution margin per direct labor hour
for the additional capacity. However, if the contribution margin per direct labor hour is lower
than the additional labor cost per hour, then it may not be cost-effective for Nestle to invest in
additional capacity.

If the company does not want to reduce sales of any product, there are several ways in
which Nestle could obtain the additional output without investing in additional capacity:

 Increase efficiency: Nestle could focus on improving the efficiency of their production
processes to reduce the time required for each unit of product, thereby increasing the
output without additional labor hours.
 Overtime: Nestle could utilize overtime for their existing workforce, allowing them to
work additional hours beyond their regular shift to increase production output.
 Shift reallocation: Nestle could consider reallocating their existing labor hours across
shifts to better utilize the available capacity. For example, if they have excess capacity
during certain shifts, they could adjust the workforce allocation to those shifts to increase
production output.
 Outsourcing: Nestle could consider outsourcing some of their production processes to
external vendors or subcontractors to increase production output without additional labor
hours.
 Cross-training: Nestle could invest in cross-training their existing workforce to have
flexibility in performing multiple tasks, which can help in optimizing labor utilization
and increasing production output.

It's important to note that each of these options may have their own pros and cons, and
careful analysis should be done to determine the most cost-effective and feasible approach for
obtaining the additional output based on Nestle's specific circumstances and production
requirements.
Cost -Volume Profit Analysis

BEP (₱)= Fixed Costs/Contribution Margin Ratio

Where,
Fixed Costs 25,260,000 (given)
CMR= Total Contribution Margin/ Total Sales
To calculate the Total Contribution Margin and Total Sales, we can use the data
provided in the table:

CMR= 46,841,000/46,841,000= 1

BEP (₱) = Fixed Costs / Contribution Margin Ratio

= 25,260,000/1
BEP (₱) = P25,260.000.00

So, the Break-even amount of sales for Nestle is ₱25,260,000.

To calculate the Margin of Safety (MoS ₱) and Margin of Safety percentage (MoS %)
in its current operations, we can use the following formulas:

MoS (₱) = Actual Sales - BEP (₱) MoS (%) = (Actual Sales - BEP (₱)) / Actual
Sales * 100

Where, Actual Sales = Total Sales = ₱46,841,000 (calculated above) BEP (₱) =
₱25,260,000 (calculated above)

MoS (₱) = ₱46,841,000 - ₱25,260,000 = ₱21,581,000

MoS (%) = (₱46,841,000 - ₱25,260,000) / ₱46,841,000 * 100 = 45.94%

So, Nestle's Margin of Safety (MoS ₱) is ₱21,581,000 and Margin of Safety percentage
(MoS %) is 45.94% in its current operations.

To calculate Nestle's Degree of Operating Leverage (DOL), we can use the

following formula:

DOL = Contribution Margin / Net Operating Income

Where, Contribution Margin = Total Contribution Margin = ₱46,841,000 (calculated above)

 Net Operating Income = ₱21,345,930 (given)

DOL = ₱46,841,000 / ₱21,345,930 = 2.20

So, Nestle's Degree of Operating Leverage (DOL) is 2.20.

The calculated amounts in the previous answers have significance in evaluating the
financial performance and risk management of Nestle, a company engaged in ice cream
production. Here's an explanation of the significance of each amount:

Break-even amount of sales (BEP ₱): This represents the minimum level of sales that
Nestle needs to achieve in order to cover its fixed costs and avoid incurring any net losses. It is a
crucial indicator as it helps Nestle determine the sales target it must achieve in order to cover all
of its fixed costs and start generating profits. If the actual sales exceed the BEP, Nestle will have
a positive net income, and vice versa.

Margin of Safety (MoS ₱) and Margin of Safety percentage (MoS %): The Margin of
Safety represents the amount of sales that exceed the Break-even sales level. It indicates the
cushion or buffer Nestle has above the Break-even point, which can protect the company against
unexpected fluctuations in sales or other uncertainties. A higher Margin of Safety indicates a
lower risk of losses. The Margin of Safety percentage is calculated by expressing the Margin of
Safety as a percentage of the actual sales, and it gives a percentage measure of how much
Nestle's sales can decline before reaching the Break-even point. A higher Margin of Safety
percentage indicates a lower risk of losses.

Degree of Operating Leverage (DOL): DOL measures the sensitivity of Nestle's net
operating income to changes in sales. A higher DOL indicates that Nestle's net operating income
is more sensitive to changes in sales, which can amplify both profits and losses. DOL is useful in
assessing the risk associated with changes in sales volume. If DOL is high, Nestle may face
higher risks during periods of low sales, as losses can magnify. On the other hand, during periods
of high sales, a high DOL can result in higher profits.

Overall, these calculated amounts provide insights into Nestle's financial performance,
risk management, and operational efficiency. They are important tools for decision-making,
financial planning, and evaluating Nestle's ability to cover costs, generate profits, and manage
risks in its ice cream production operations.

Variance Analysis
1. Materials
Variances:
a) Price Variance = (Standard Price - Actual Price) x Actual
Quantity
= (₱153.50 - ₱153.52) x 15.99 = -₱0.02 x 15.99 = -₱0.32
(Favorable)
b) Quantity or Usage Variance = (Standard Quantity - Actual
Quantity) x Standard Price
= (16 - 15.99) x ₱153.50 = -₱0.16
(Favorable)
c) Spending Variance = Price Variance + Quantity
Variance
= -₱0.32 + (-₱0.16) = -₱0.48
(Favorable)
Analysis: The materials variances are all favorable, indicating that Nestle paid slightly
less for materials than expected (Price Variance), and used slightly less materials than
expected (Quantity or Usage Variance). The total spending variance of -₱0.48 suggests
that Nestle saved some costs on materials for the Classics Product Line during the period.

2. Labor & Overhead Variances: a) Rate Variance = (Standard Rate - Actual

Rate) x Actual Hours
= (₱68 - ₱70) x 0.63 = -₱1.26
(Unfavorable)
b) Efficiency Variance = (Standard Hours - Actual Hours) x
Standard Rate
= (0.65 - 0.63) x ₱68 = ₱1.36
(Favorable)
c) Spending Variance = Rate Variance + Efficiency
Variance
= -₱1.26 + ₱1.36 = ₱0.10
(Favorable)
Analysis: The labor and overhead variances are mixed, with the Rate Variance being
unfavorable due to higher actual labor rate compared to the standard rate, but the
Efficiency Variance being favorable due to lower actual labor hours compared to the
standard hours. The total spending variance of ₱0.10 suggests that Nestle saved some
costs on labor and overhead for the Classics Product Line during the period.

3. Total Spending Variance: The total spending variance is the sum of the favorable
materials spending variance (-₱0.48), and the favorable labor & overhead spending
 variance (₱0.10). Total Spending Variance = -₱0.48 + ₱0.10 = -₱0.38 (Favorable)
Analysis: The total spending variance of -₱0.38 indicates that Nestle saved some costs
overall for the Classics Product Line during the period.
Based on the given data and variance analysis, the possible causes of materials, labor, and
variable manufacturing overhead variances are as follows:
 Materials Variances:
a) Price Variance: The price variance for materials is ₱0.02 favorable, which means that
the actual cost of milk fat (₱153.52) is slightly lower than the standard cost (₱153.50).
Possible causes of this favorable variance could be negotiation of better prices with
suppliers or purchasing materials at lower prices due to market conditions.
b) Quantity or Usage Variance: The quantity or usage variance for materials is ₱0.03
unfavorable, which means that the actual quantity of milk fat used (15.99 units) is slightly
higher than the standard quantity (16 units). Possible causes of this unfavorable variance
could be wastage or inefficiencies in the production process.
 Labor & Overhead Variances:
a) Rate Variance: The rate variance for labor is ₱0.10 favorable, which means that the
actual labor rate (₱70 per hour) is lower than the standard labor rate (₱68 per hour).
Possible causes of this favorable variance could be cost-saving measures in labor hiring
or renegotiation of labor rates.
b) Efficiency Variance: The efficiency variance for labor is ₱0.10 unfavorable, which
means that the actual labor hours (0.63 hour) are slightly higher than the standard labor
hours (0.65 hour). Possible causes of this unfavorable variance could be inefficiencies in
the production process or lower productivity levels.
c) Spending Variance for Variable Manufacturing Overhead: The spending variance for
variable manufacturing overhead is ₱0.07 favorable, which means that the actual variable
manufacturing overhead cost (₱22.68) is lower than the standard variable manufacturing
overhead cost (₱22.75). Possible causes of this favorable variance could be cost-saving
measures in variable manufacturing overhead expenses or better utilization of resources.
 Based on the variance analysis, it is recommended to further investigate the causes of the
unfavorable quantity or usage variance for materials and the unfavorable efficiency
variance for labor in order to identify and address any wastage, inefficiencies, or
productivity issues in the production process. Additionally, it may be beneficial to
continue monitoring and managing costs through negotiation of favorable prices with
suppliers, cost-saving measures in labor and variable manufacturing overhead expenses,
and efficient utilization of resources to achieve favorable variances and improve
profitability.
The significance of these amounts is that they provide information on the cost performance
of the Classics Product Line, identifying areas where costs were favorable or unfavorable
compared to the standard costs. This information can be used to further investigate the causes of
variances, take corrective actions, and make informed decisions to improve profitability and
operational efficiency.