3.

(a)

A B
($) ($)
Selling Price/Unit 60 70
Direct Material cost (2) (40)
Variable overheads cost (28) (4)
Contribution per unit 30 26

Bottleneck hrs/unit 0.02 0.015

Contribution per bottleneck
(30/.0.2, 26/0.015) $1500 $1733
Ranking in production 2 1

Hours Hours Production

Product Demand Required Available units
B 45,000 x 1.2 = 54,000(x0.015) 810 810 (/0.015) 54,000
A 120,000 x 1.2 = 144,000(x0.02) 2,880 2,265 (/0.02) 113,250

Maximum profit
Total
Product Units Contribution per unit Contribution ($)
B 113,250 $30 3,397,500
A 54,000 $ 26 1,404,000
4,801,500
Fixed production overhead (1,470,000)
Maximum net profit 3,331,500

(b)
(i) Throughput return per production hour
(Selling price-material cost)/ hrs on bottleneck resource

A B
($) ($)
Selling price 60 70
Material cost 2 40
Throughput return 58 30
Bottleneck hours per unit 0.02 0.015
Return per bottleneck hour $2,900 $2,000
Ranking 1 2
Profit maximization product mix

Hours Hours Production

Product Demand Required Available units
A 144,000 2,880 2,880 (/0.02) 144,000
B 54,000 810 195 (/0.015) 31,000
3,690 3,075

Maximum profit

Throughput return Total

Product Units per unit Income ($)
A 144,000 $ 58 8,352,000
B 13,000 $ 30 390,000
Throughput return 8,742,000
Overheads
Fixed (1,470,000)
Variable (120,000 x $28) + (45,000 x $4) (3,540,000)
Maximum net profit 3,732,000

(ii) Throughput accounting ratio for product B

TAR = Throughput return per hour / overall total overhead cost per hr

Overall total overhead cost per hr = $ (3,540,000 + 1,470,000) / 3,075

= $ 1,629.27

Therefore TAR = $2000/ $1,629.27

=1.2

(iii)
Throughput accounting ratios are used to see how much a bottleneck (scarce)
resource will generate as a return in different products. It is used as a decision
making tool when trying to decide which product to make first so as to
maximize profit.
There are several ways that a TAR can be increased. The major problem in
trying to adjust TPAR is that value engineering is involved thereby most of the
decisions end up with one side suffering e.g. prices can be adjusted upwards
but that would make demand for the product go down. Another option
would be to make the same product but with cheaper material products
but then again that would lower the quality of the product.
Another option would be reducing components of a product but coming up
with the same end product. That would however displease some customers
who would not see their value for money there’re by stop buying the product.
In cases of product B, however raising the price up would not be ideal since it
is already selling at a higher price than product A.
Reducing the direct material costs would also prove to be hard since it is
evident that product B is a high specification product therefore needing
special products with the higher prices.
Throughput accounting has proved to be a good indicator and measure of
calculating the best product mix for production.
Since the TPAR for product B is already above 1, it is a product that is making
profits and viable for production as it is.