R = 1 000 units * 2 hours/per unit = 2 000 hours

P = 200 units *15 hours/per unit = 3 000 hours

Q 350 units * 8 hours/per unit = 2 800 hours
TOTAL = 7 800 hours

Optimum Product Mix is 1 000R, 200P & 350Q

A company has a contract in need of 3 000 hours.

:: We need to 3 000 hours since we have none to spare, we must sacrifice the existing hours
allocated. Sacrifice begins with the product that gives us the least contribution/bottleneck in
this case contribution/hour

P Q R
Contributions/hr 14 9 23
Rank 2 3 1

Q gives us the least contribution

Q:2 800 hrs * 9 = 25 200
P: 200 hrs * 14 = 2 800
Total Contribution forgone: 28 000
Direct Labour hours: 3 000 * 20 = 60 000
Total relevant: 88 000

MAKE OR BUY
Use the same technique, as limiting factor analysis. The only difference here, is we rank
according to the savings per bottleneck
L M N P
Production Cost 55 46 34 23
Fixed Cost (10) (6) (4) (3)
Variable Cost 45 40 30 20

Supplier 57 55 54 50
Savings/unit 12 15 24 30
Savings/machine hours 3 5 4 6
Savings/bottleneck 4 3 6 5
RANK 3 4 1 2

Machine hours 24 000hrs max

N: 1 500 * 4 = 6 000hrs
P: 1 500 * 6 = 9 000 hrs
L: 1 500 * 3 = 4 500 hrs
M: 900 * 5 = 4 500hrs

Purchase from supplier: 1 500 – 900= 600units

600 units * 55 = 33 000
900 * 40 = 36 000
Total relevant cost = 69 000

ACCEPT OR REJECT

1.) Askourselves, should we take the contract or are we better off without it. Calculate
our contribution if we do not take the contract

BASIC SCIENTIFIC
Selling Price 5.50 7.5
Direct Material 1.25 1.63
Labour @ 6/hr 1.5(0.25hrs) 2.25 (0.375hrs)
Contribution/Unit 2.75 3.62
Contribution/hour 11 9.653
Total contribution= 22000 (2.75*8000) 14 480(3.62*4000)
= 22 000 + 14 480
= 36 480

SPECIAL CONTRACT : 1 200HRS

MAKE BUY
Production cost 2 500
1 000.
150 * ( 6 + 9.653)
3 347.95

Sales: 35 000
Direct Material: (2 500 + 9 000) 11 500
Direct Labour: (1 200 * 6) 7 200
Contribution: 16 300
Contribution/labour hour: 13.58

Special Contract: 1 200

Scientific Calculators: 300
Basic Caclulators; 2 000

SHUT DOWN DECISION

1. Realign the table In a marginal costing format

W X Y Z
Sales 30 000 20 000 35 000 15 000
Variable Cost
COS (4 800) (1 600) (13 200) (5 000)
Variable Selling (3 000) (2 000) (3 500) (1 500)
Contribution 22 200 16 400 18 300 8 500
Specific FC 5 200 2 400 1 800 2 000
NET 17 000 14 000 16 500 6 500
FIXED COSTS
Non spec (20 000)
Selling(5000*4) (20 000)
Administration (8 000)
Net profit: 6 000

Discontinue Operations
W X Y (Z Discontinued)
Sales 30 000 20 000 49 000(35k *1.40)
Variable Cost
COS (4 800) (1 600) (18 480) (13 200 *1.4)
Variable Selling Cost (3 000) (2 000) (4 900)(3 500*1.4)
Contribution 22 200 16 400 25 620
Specific FC 5 200 2 400 2 340(1 800*1.3)
NET 17 000 14 000 23 280
FIXED COSTS
Non spec (20 000)
Selling(6667*3) (20 000)
Administration (8 000)
Net profit: 6 280

Specific Fixed Cost Calculation

W X Y Z
Total FC 31 400 11 200 6 400 8 800 5 000
Non specific 20 000 6 000 4 000 7 000 3 000
Specific Cost 5 200 2 400 1 800 2 000