RELEVANTCOSTI

NGTECHNI
QUEFORDECI
SIONMAKI
NG

Rel
evantormar ginalcost ingi sadeci sion-maki ngt echnique.Thi smakesi tpr omi nent
ortheappl i
cabl et echni quet ousewhendeci sionsar eshor t
-ter m oroneof fnat ure.
Gener
ally,todeci det hebestal t
ernat i
veact iont wocogentf act orsar enormal lyt aken
i
ntoconsideration.Thesear e:
 QUANTI TATI VEFACTORS-t hecomput ationoranal ysisoft henetbenef itor
lossf rom t heal ternat iveunderconsi deration.Thecomput at
ionoranal ysisof
dat athatcanbequant ifi
edi nt ermsofmoneyv alue,inot herwor ds,goodsor
servicest hatcanbev alued.Thi sisdoneusi ngr elevantormar gi
nalcost i
ng
techniquewi ththeunder standingoft hef ollowing:
 Rel ev antI ncome:Thi si st he gr oss income expect ed/budget ed or
accr uabl ef r
om t heal ternativ
eunderconsi derat i
on.I ti stheexpect ed
grossi ncome,i ftheal t
ernativei saccept ed.Thi si seasilyident ifi
able
becausei tist hesamet obot hmar ginalandabsor pt i
oncost i
ngt echni que.
 Rel ev antCost s:Thesear ecost st hatmakedi ffer encebet weent woor
mor eal t
er natives.Theyar efuturecostt hatwi llbenecessar yorav oidable
dependi ngont heaccept anceorr ejecti
onofanal ternati
ve.Ther elevant
cost sar eexpect edf uturecost s/l
osst hatwilldifferamongal t
ernat i
ves.I t
cant hereforebesai dt hat,onl yt hosecost sthatar ef uturi
stic,di ff
er
among al ternat i
ves and t raceabl e di r
ectl
yt ot he alter
native under
consi der ationar er elevant.Inmar ginalcost ing,t hesecost sar ebr oadl y
categor i
zedi nt of our,asf oll
ows:

a.Var i
ableCost s:Inl inewi thear li
erknowl edgeoft hister m, thesear e
cost sthatmov ei nsy mpat hyl evelwi thact ivity.Byt his,i timpl ies
thereforet hat ,v ariable cost s ar ef utur e cost ,cost st hatar e
necessar ybecauseofdeci siont oacceptanal ter nati
v eandi fsuch
alt
er nativ
ei sr ejectedt hesecost swi llbeav oidedorwi llnol onger
benecessar y.Gener ally,ther ear esomecost st hatar ecommonl y
referredt oasv ar i
abl e,suchas;mat erialcost s,l abourcostand
variable ov erheads.Fur therdi scussi on oft hese cost s wi l
lbe
necessar yt ounder st andt het reatmentoft hesei nmar gi nal costing.
 Mat erialCost s:Mat erialcosti s gener allyr elev anti fno
furtheri nf ormat ion i s pr ovided.Buti n mar ginalcost ing
mat erialcanbev aluedusi nganyoft hef ol l
owi ng;pur chase
cost ,repl acementcostornetr eal izablev al ue.Whi chonet o
usedependsont heposi t
ionoft hemat erialatt hatpoi nti n
ti
me.Weusepur chasedcostonl yift hemat eriali snoty et
purchased.Whi leformat er i
alal readypur chased, wecanuse
eit
herr epl acementcostornetr ealizablev alue.Repl acement
costwi llbeusedi fthemat erialisofcont i
nuoususage,t hat
i
s,al ter nat i
ve usage of cur rent st ock wi llnecessi tate
replacement .Mat eri
alal r
eadypur chasedbutcanbesol d,
willhav ei tsdi sposabl ecostr elev ant.Not et hat,i ftherei sa
needt oi ncuranycostbef oredi sposalsuchcostwi llbe
deduct ed bef orear rivi
ng att henetr ealizablev alue.Any
mat erialt hatcanbesubst i
tut edf oranot hermat eri
alwi l
l
mai ntaincostoft hatot hermat er i
all essconv er sioncost

1
 relevant .Anymat eri
alal r eadypur chasedandcannotbesol d,
norconv ertedt oanot hermat er ialwi llnothav eanyr elev ant
cost .
 Labourcost s:Relevantl abourcosti ncludeswages, over t
ime
premi um t obepai dandoppor tunitycostofl abour .Salar yis
gener all
yr egar dedasaf ixedcostandi r
relevantcost .The
remuner ationt ounski ll
edst affi sexpect edt obewagesand
relevantcost ,whil
et her emuner ationt oski ll
edst affissal ar y
andi rrelevantcost .Ifl abourr emuner ati
oni sbasedont ime
e.g.sal ary,i tisaf ixedandi r
r elev antcost ,butwhenl abour
remuner ationi sbasedonact i
v i
ty ,itisav ariablecostand
relevantcost .Butnot et hat ,t her ulesabov ehowev erisnot
applicabl ei n a si tuat i
on wher el abouri st o be engaged
specifical l
yf ort healter nat iveunderconsi deration,eit
hert he
remuner ationi sbasedont imeoract i
vi
tynotmat erial,itis
per f
ectlyaf utur ecostandar elev antcost .
 Var i
ableov er heads:Var iablepr oduct i
onov erheads,v ariable
expensesandot herv ar iablecost sasi tmaybegi ven,i s
assumedt obeaf utur ecostandt heref
or e,ar elevantcost ,
unlessot her wisest ated.

b.Opportuni t
yCost s:Thisi sabenef itforgoneononeal ternat i
ve
becauseofaccept i
nganot heral t
er nati
ve,whi chmustbei ncluded
aspar tofr elev
antcostoft heal t
ernat i
veaccept ed.Forexampl e,a
Companyacqui r
edl andsome10y ear sagof orN2mi ll
i
on, present l
y
thecompanyi scont empl atingwhet hert obui l
daf actoryont he
l
and.TheN2mi ll
i
onwoul dbei gnoredqui teallright,
usingmar ginal
costi
ng, asasunkcost .Howev er,i
ft helandcoul dbesol dcur rent l
y
forN10mi ll
ion,alt
hought her ewoul dbenodi r
ectcashf lowr elating
tothel and,wewoul dbel oosi ngN10mi l
li
onbybui l
dingthef act ory,
which coul d hav e been ot her wi
se r eali
zed bysel li
ng the l and.
Therefore,t heN10mi ll
i
onwoul dbet reatedasacostknownas
opportunity cost whi le est i
mat ing t he cost of t he f actor y
.
Opportuni t
ycosti salway sappl icablewhenev erar esour cehas
alt
ernativeusage.Forexampl e,agai n,ifadi rectlabourhourcost
N5perhour ,andi tiscurrent l
yusedf orapr oductt hati sgivena
contri
but i
on ofN8 perhour .Ift herei sal t
ernativepr ojectt hat
requi
ret hesamel abourhour , t
her elevantcostwi l
lbeN13perhour .
Thatis,t hecostperhour( N5)pl ust heoppor t
unitycostperhour
(N8).

c.Savings:Usingmar gi
nalcosttechniqueanot herterm andr el
ev ant
i
ncomenor mall
ytakeintoconsider
ationiswhati scalled“savings” .
Thisinsteadofbeenacosti sanincome.I ti sanincomedr ivable
fr
om al t
ernati
vequalifi
cati
onofcost .Savingsi sdef i
nedasan
expectedcostwhi chwillnolongerbenecessar yifthealternative
underconsiderat
ionisaccepted.Forexampl e,let’
sassumet hata
companyboughtsomeamountofmat eri
alsomey earsagowhi ch
i
snowobsol et
eandi scontemplati
ngdisposingoft hesaidmat erial

2
 atacostofN10, 000.Butther eisanal ter
nati
ve,beenconsidered
now,whi chi
facceptedwemakeuseoft hisalr
eadycondemned
materi
al,totheef f
ectthatt hedi sposalcostenv i
sagedwi l
lno
l
ongerbenecessar y.Thedisposalcostt hatwillbeav oi
dedwi l
l
ther
eforebetreat
edasasav ingwhi lecomput i
ngthenetbenefitor
l
ossoft healter
nati
ve.Savi
ngsshoul dbededuct edfrom other
rel
evantcost
soraddedt other el
evantincome.

d.Rel evantFi xed Cost s:Forf ixed cost st o be r elevant,itmust

possesst hechar acter i
sticofr elevantcost s,thati s,itmustbe
futur
ist
ic,i
tmustbet raceabl etoheal ternativeandmakedi fference
among al ternatives.The cost s wi llbe i ncurr
ed as a r esul tof
acceptanceofanal ter native,sucht hati ftheal ternativ
eisr eject ed
thecostswi llnol ongerbenecessar y .Af i
xedcostwi llberelev anti f
iti straceabl e,cont rollable,av oi
dabl e,addi tional,attri
but abl e,
elimi
nable,separ able, i
ncr ement al ,f
ut ureorr elevant.
 Ir
rel
ev antCost s:Thesear ecost st hatdomakeadi fferencebet weent woor
moreal ter
nat i
ves.Thesecanei t
herbehi storicalcost sorcost st hatarej oint l
y
i
ncurredbyt woormor eal ternativesandt hereforecoul dnotbet r
aceddi rect l
yt o
a single alternat
ive withoutnecessar i
lyt aken t he ot heral ternati
ves i nto
considerat
ion.Asment ionedear l
i
er, irr
elevantcost si nclude:

 SunkCost s:Ot herwiseknownashi st or i

calorpastcost s.Inmar gi nalcost,cost s
alreadyi ncur redar egener allydi sregar dedi ndeci di
ngonf utur ealternat i
ves.
Sincet hef undshadal r
eadybeencommi tt
edandcannotber ev ersed,ther efore
suchcommi ttedf undswoul dbedi sr egar dedunl essithasar eali
zablev alue
wher etheoppor tuni
tycostwi l
lbeconsi deredasar epl
acementoft hesunkcost .
 Irr
el evantFi xedCost s: Thesear ef ixedcost sthatdonotmakeadi fference
bet weent woormor ealternatives.Thet ableabov eshowssomequal ifi
cat i
ons
thatmakef ixedt obei r
rel
ev ant.Itisper t
inentt onotethatfi
xedcosti sgener all
y
i
rrelev ant.Itmustbequal i
fi
edasr elev antbef oreweshoul dtreati tasr elevant.
Justasv ar iablecost saregener al
lyr elev ant ,
itneedstobequal ifiedasi r
relev ant
bef orewet reati tassuch.

 QUALI TATIVEFACTORS
Thisi nvolves t
he consi derat
ion off act
orsthatar e notquantifi
abl ein natur e but
pert
inentt of ut
uredeci sions.Byt hi
swer ef
ertoot hervari
ablesaf fecti
ngdeci sions,
whichcannotbev alued.Thesef actorsmayi ncludepol i
ti
calsituations,gover nment
l
egislati
on,av ai
labi
lit
yofmar ket,natureofmar ket,tradesurvey,technicalper sonnel,
l
eveloft echnology,goodwi ll
,avai
labi
lit
yofmat eri
al,avail
abi
li
tyoff undset c.Thesewi l
l
sti
l
lbedi scussedf urt
herwhi leconsideri
ngsomeoft hedecisionst hatknowl edgeof
marginal cost
ingtechniquescanai d.

Margi
nalcosti
ng t echni
ques shoul
d be used i
n assi
sti
ng managementwhenev
er
deci
dingonal
ternati
vessuchas:
i
. Makeorbuydeci si
on
i
i
. Droppingorr et
aini
ngacent
er
i
i
i. Sel lorprocessfurt
her
i
v. Speci alpri
cing

3
 v
. Opt
imal
productmi
x.Uj

MAKEORBUYDECI SION
Inamul t i
-productor gani zat i
on,wher et hepr oduct ionpr ocessi smor et hanonest age,
managementmaybecont empl atingwhet hert opr oducepar tofitspr oduct i
onpr ocess
orsub- assembl yint ernal l
y ,ort obuyf rom out sidev endori nor dert oconcent rateand
i
mpr ov eonf inishi ngpr ocess.Taki ngdeci sionssuchast heser equiret hepr incipleof
mar ginalcost ingt echni que.Ther ef ore,managementneedst oinvolvet hemanagement
account antt opr epar et hequant i
t ativef act orusi ngmar ginalcost i
ngt echni quewher e
thefollowi ngf uturer elevantcost swi l
lbecompar ed.
Thesuppl i
erquot ation (
a)
Ther elev antcostofmaki ngi nter nally ( b)
Wher e“ a”i sgr eat ert han“ b”i tisadv i
sabl et omakei nternall
y.Andwhen“ a”isl ower
than“ b”itisadv isabl et osub- cont ractt ot heext ernalsuppl i
er.Inasi tuationwher e“a”i s
equalt o“ b”t hequal it
at i
v ef act orwi lldet erminet her ati
onalopt i
ons.I tisequal l
y
i
mpor tantt o not et hatsomet imest hequant i
tativef actormayf avourbuy i
ngf rom
outside, butconsi der ationoft hequal i
tat i
vef act ormaychangesuchadeci sion.
Notet hatr elev antcost si ncl ude;v ar i
abl ecost s,oppor tunit
ycost ,sav i
ngsandr elev ant
fi
xedcostasdi scussedabov e.
Someoft hequal itativef act or st obeconsi der edmayi nclude;
i. Thesecr ecyoft het rade, byt het i
mecompet it
orsknowt hatt heycanpr oduce
par tofapr oductcheaper ,thiscanpr omptt hem togoi ntopr oduct i
onoft he
f i
nishedpar tandt akeov ert hemar ket.
ii
. Av ailabilit
yofacompet entsuppl ier.
ii
i. Theabi l
ityoft hesuppl i
ert osuppl yt ospecificati
onandt imely.
iv. Thecapaci tyoft hesuppl i
erandabi li
tytomeetf utureincreasei ndemand.
v. Ther ei sneedt oconsi deri fthecompanyhast echnicalknow- howt oproduce
thecomponentorf undt hepur chasef astandef fi
cient
ly.
vi. Theneedf orqual itycont rol.
vii
. Rel at ivemer i
tsofot herout sidesuppl i
ers.
vii
i. Abi l
ityt or enewpr oduct i
oni fpr i
cei sunsat i
sfactory.

ILLUSTRATI ON1-ACompanyi satpresentassembli

ngoneoft hecomponent
sneeded
foraf i
nalproduct .Theannualquant
ityrequi
redis20,000uni
ts,andt
heannualcostat
presentisreportedasf ol
lows:
N’000
Directmat eri
al 600
Directwages 400
Supervisor-avoi
dablei
fmanufacturei
sdiscont
inued 100
Floorspaceoccupancy 70

Theassembl i
escouldbepur chasedforN61.00eachfrom anoutsi
desuppl i
er.I
fthi
s
were done,the fl
oorspace v acat
ed coul
d be used forst
orage purposes,savi
ng
warehouserentandtr
ansportcostsofN180,
000p.a.
Shouldthecompanycont i
nuet oassemblethecomponent,orbuyitfrom theoutsi
de
suppl
ier
?

ILLUSTRATI
ONI I
:CHI
JUKA( Ni
g)Lt
dmakesfourcomponent
sA,B,CandDf
orwhi
ch
costsint
hefor
thcomi
ngyearar
eexpect
edt
obe:

4
 A B C D
Pr
oduct
ion(
Uni
ts) 2,
000 4,
000 8,
000 6,
000
Uni
tMar
ginal
Cost
: N N N N
Di
rectmat
eri
als 8 10 4 8
Di
rectl
abour 16 18 8 12
Var
iabl
epr
oduct
ionov
erhead 4 6 2 4
28 34 14 24

Tot
alf
ixedcost
sperannum:
I
ncur
redasadi
rectconsequenceofmaki
ng:
A N2,
000
B N10,
000
C N12,
000
D N16,
000
Ot
herFi
xedcost
s N60,
000
N100,
000

Asubcontr
actorhasoff
eredtosuppl
yuni
tsofA,
B,CandDforN24,
N42,
N20andN28
r
espect
ivel
y.ShouldChi
jukamakeorbuyt
hecomponent
s.

ILLUSTRATI ON II
I:A fir
m i s consider
ing whet herto manuf act
ure orpur chase a
particularcomponentk543.Thi swoul dbei nbatchesof10, 000andt hebuyinginpr i
ce
wi l
lbeN6. 50.Themar gi
nalcostofmanuf acturi
ngcomponentofK543i sN4. 75peruni t
andt hecomponentwoul dhavet obemadeonamachi newhi chwascur r
entlywor ki
ng
atf ullcapaci t
y.I
fthecomponentwasmanuf actured,i
tisestimatedthatthesal esof
fini
shedpr oduct'FP97'willber educedby1, 000uni t
s.'FP97'hasamar ginalcostof
N60. 00/ unitandsel
lsforN80.00/ uni
t.

Det
erminewhet
herornott
hef
ir
m shoul
dmanuf
act
ureorpur
chasecomponent
"
K543".

TRYTHIS
Bol
uLimitedisconsider
ingnexty
ear’
spr oducti
onandpur chasebudget
s,oneofthe
componentsproducedbyt hecompany,whi chisincor
poratedint
oanotherpr
oduct
bef
orebeingsol
d,hasabudgetedmanufactur
ingcostasfol
l
ows:

5
ToluLimitedhasof f
er edt osuppl ytheabov ecomponentataguar anteedpr i
ceofN90
perunit
.
Requir
ed:
a.Consi der i
ng cost cr i
terion onl y,adv i
se management whet her the abov e
componentshoul dbepur chasedf r
om Tol ul i
mi ted.Al lcalculati
onsshoul dbe
shown and assumpt i
ons made on aspect s,whi ch may r equir
ef urt
her
invest i
gation,shoul dbecl earlystated.
b.Expl ainhow y ourabov eadv icewoul d beaf f ected byeachoft hesepar ate
situationsshownbel ow:
i. As a r esul tofgov ernmentl egisl
at ion,i fBol u Li mited continues to
manuf actur et his componentt he company wi llincuran addi ti
onal
inspect i
oncostofN98, 000perannum,whi chi snoti ncludedi ntheabov e
budget edmanuf act uri
ngcost s.
ii
. Addi ti
onall abourcannotbeder i
v edandi ft heabov ecomponenti snot
manuf actur edbyBol ul i
mitedt hedir ectl abourr eleasedwi llbeempl oyed
ini ncreasi ng t hepr oductionofanexi sting pr oductwhi chi ssol dfor
N120. 00andhasabudget edmanuf act uri
ngcostasf oll
ows:
N
Directmat erials 20. 00
Directlabour( 4hr s@ N10) 40.00
Var i
ableov erhead( 4hrs@ N10) 40.00
Fixedov erhead( 4hr s@ N5) 20.00
Costperuni t 120.00
c.ThePr oductionDi r
ect orofBol uLi mit
edr ecent l
ysai dwemustpr oducet he
productbecausewej ustpur chasedsomespeci algr indingequi pmentt obeused
excl usivel
ybyt hiscomponent .Theequi pmentcost sN25, 000.Itcannotber esold
orusedel sewher eandi fwesei zepr oductionoft hiscomponentwewi l
lhav eto
wr i
teof ftheassetatwr i
ttendownbookv alueofN120, 000.

2.
DROPPI
NGORRETAI
NINGACENTER

Acentertothi
seffect
,maybeaper son, product
,depar
tment
,divi
sion,regi
on, segment
,
sect
ion,etctowhichcostaswellasr ev enuecanbeseparatel
yidentifi
edi.e.aprofi
t
cent
er.Managementmaybecont empl atingtodropaparti
cularcenterbasedont he
fi
nanciali
nfor
mati
onpr epar
edbyaf inancialaccount
antshowingt hatt hecenteris
conti
nuouslymaki
ngal oss.

Takenadecisi
ontoretai
nordropacentershoul
dnotbebasedoninf
ormationpr epar
ed
byaf i
nanci
alaccountantbecomessuchi nf
ormati
onwouldhavebeenpr eparedwi t
h
arbi
tr
aryabsorpt
ionoff i
xedov er
head.Inst
eadaquantit
ati
vefactorpreparedbya
managementaccountantusingmargi
nalcosttechni
quewi
llbeofhelp.Becausesuch

6
i
nformati
on woul d hav e consi
der
ed t he r
elevantcostoft he centerand equall
y
consi
deredther elevantcoststodeterminewhet hert
her
ewillbeanetbenef i
torloss
fr
om thecenter.Ifitisanetbenefi
t,iti
sadv i
sabletoret
aint
hecenter,buti
fiti
sanet
l
oss,iti
sadvisabletodr opthecent
er.

Thei nformat i
on prepared byt hemanagementaccount antusi ng,mar ginalcosting
technique,wi l
ldiff
erf rom thatofaf inancialaccountant ,usi
ngabsor ptioncosting
technique,becausemar gi
nalcost i
ngwi llonlytakei nto considerat
iont herelevant,
separable,and f utur e cost of the cent er and av oid un-necessary absor ption,
apportionmentoral locati
onoff ixedoverhead,whichwi llremainconst antwhet herwe
droporr etai
nthecent er.Jointorgener alfi
xedov erheadswi llbeun- affectedbyour
decisi
ont odropapar t
icul
arcent er
,totheext entthat,i
facent erishav i
ngaposi tiv
e
contri
but i
onandi sdr opped,thecompanypr ofi
twil
lber educedbyt hequant um ofthe
positi
vecont ri
but
ion.

The statementabove,only consi

dersthe quanti
tat
ivefact
ors.Ther
e are some
qual
i
tativefact
orst
hatmustbeconsider
edindecidi
ngtoret
ainordropacent
er.These
mayinclude:

i
. Theal ter
nati
veusesoft hecenter.
i
i
. Re-actionoftheinvestorsandcr edi
torsoft hecompany .
i
i
i. Re-actionofempl oyeesandt radeunions.
i
v. Redundancycostort erminalbenefi
ttot heempl oyeesi frequir
ed.
v
. Natureofdemandf ort hepr oduct,thati s,isitjointdemandorder ived
demand.
v
i. Theef fectongoodwi ll
oft hecompany .
v
ii
. Theel asti
cit
yofdemandoft heproductandot herproduct sinthecompetiti
ve
mar ket.
v
ii
i. Natureofpr oductandt hestageoft hepr oductinthepr oductlif
ecycle.
i
x. Fateofempl oyeespr oducingtheproduct /engagedint hedepar tmentetc.

ILLUSTRATION1–
A companypr oducest
hreepr
oduct
sforwhi
ch t
hef
oll
owi
ng st
atementhasbeen
produced:

X(
N) Y(
N) Z(
N) Tot
al(
N)
Sal
es 32,
000 50,
000 45,
000 127,
000
Tot
alcost
s 36,
000 38,
000 34,
000 108,
000
Netpr
ofi
t/
(l
oss) (
4,000) 12,
000 11,
000 19,
000

Thet ot
alcostscompr
iset
wot hi
rdvar
iableandonethirdfi
xed.TheDirect
orconsi
der
ed
thatasproductXshowsalossini
tsoperati
ngresul
t,i
tshouldbedisconti
nued.
Requi
red:
a.Basedontheabove,
shoul
dpr
oductXbedropped?
b.Whatotherf
actor
sshoul
dbeconsi
der
ed?
7
I
LLUSTRATION II-Acompanypr
ovi
desy
ouwi
tht
hef
oll
owi
ngi
nfor
mat
ionabouti
ts
t
hreepr
oductsl
ine

Thecompanyi sconsi
deri
ngadisconti
nuationofpr
oductAbecauseiti
snotgenerat
ing
suf
fici
entprofi
t.Youarefurt
heri
nformedt hatt
hevari
abl
ecostofeachproducti
sgiven
asfoll
ows:
Product A B C
Vari
ablecostofgoodssol
d 70% 80% 60%
Vari
ablesell
i
ngexpenses 20% 30% 40%

IfproductAisdropped,gener
alfi
xedcostwi llbereducedbyN20,
000,whil
ethef i
xed
elementofcostofgoodssoldofproduct“B”willi
ncr
easeby5%andsell
ingexpensesof
product“C”wi
lli
ncreaseby2%init
sv ari
ablecost.

Requi
red:
Shoul
dpr
oductAbedr
opped?

ILLUSTRATI ON I I
I– ThemanagementofHeRei gnsCompanyi sreviewingthe
profi
tabil
i
tyoft hecompany ’
st hr
eeproduct
sandt hepotent
ialeff
ectsofsev eral
proposalsforv aryi
ngtheproductmix.Anexcer
ptfrom t
hedet ai
l
edst atementof
compr ehensiv
ei ncomeareasfoll
ows:

PRODUCTS
TOTAL(
N) A(
N) B(
N) C(
N)
Sal
es 812,
000 200,
000 360,
000 252,
000
Costofgoodssol
d 515,
480 95,
000 141,
120 279,
360
Gr
osspr
ofi
t 296,
520 105,
000 218,
880 (
27,
360)
Oper
ati
ngexpenses 155,
840 38,
800 59,
520 56,
520
Pr
ofi
tbef
oret
ax 140,
680 65,
200 159,
360 (
83,
880)
Uni
tssol
d 10,
000 12,
000 18,
000
Var
iabl
ecostofgoodsol
dperuni
t N5.
00 N6.
00 N13.
00
Var
iabl
eoper
ati
ngexpensesperuni
t N2.
34 N2.
50 N2.
00

8
Thef
oll
owi
ngt
hreepr
oposal
sar
ebei
ngconsi
der
edi
ndependent
ly:
a.Di scont i
nuanceofPr oductC;t hi
swi llleadt olossofcust omerscausi nga
decr easei nsalesofPr oductBby500uni ts.
b.I ncreasi ngthesalespr icesofProductC.Ani ncr
easeoft hesalespri
cet oN16
willdecr easethenumberofuni t
ssoldt o15, 000
c.Usi ngt heplantinwhichPr oductCispr oducedt oproduceanewpr oductD.Tot al
variablecostandexpensesperuni tofPr oductDwi l
lbeN16. 10and16,000uni ts
can besol d atN19. 00 each.IfPr oductD i sint
roduced,ProductC wi llbe
discont inued.
Youarer equi redt ogiveyouradv i
ceonwhi choft hethr
eeproposalsshoul
dbeadopt ed.
(Usecomput ationtosuppor ty ourposi
ti
onandassumet heactivi
tyofotherproduct s
remainst able) .

TRYTHI S-GreenPLC producesthr

eeproduct
s,t
heAlpha,BetaandGamma.Dr af
t
budget
edfigur
eshavebeenprepar
edfort
hefort
hcomi
ngfinanci
aly
earasf
oll
ows:

Thefi
gureswerepresent
edatarecentboardmeeti
nganditwasdecidedthatbecause
ofthepessi
misti
cf or
ecastf
ortheGamma,anumberofdi ff
erentopti
onsshouldbe
exami
nedwithaviewt oi
mprovi
ngtheprof
it
abi
li
tyofthecompany.Theopti
onsare:

OPTIONA
Tosubst it
utetheGammapr oductwithanew product
,theDel
ta.Forecastsrel
ati
ngto
theDeltaforthefi
rsty
earare:
Sales N460,
000
Variablecost
s N250,000
ThefixedcostsofN32,000direct
lyatt
ribut
abl
etotheGammapr oductwillbeeli
minat
ed.
Howev er,addi
ti
onalfi
xedcostsdirect
lyatt
ri
but
abletotheDel
taproductofN52,000will
beincurred.

OPTI ONB
To updat ethe appearance ofthe Gamma productby usi
ng the l
atestf
ini
shing
techniques.I
tisanti
cipatedthatthi
swilll
eadtoapr i
ceincr
easeof16%.Additi
onal
vari
able costs of10% oft he new pr
ice wi
l
lresultfr
om using t
he new f
ini
shing
techniques.

OPTIONC
Toreducethesell
i
ngpri
ceoft
heGammapr oductby5%whi
chshoul
dgener
atea20%
i
ncreasei
nunitsal
esoft
heGammaproduct
?

OPTIOND
Todi scont
inueproduct
ionoftheGammapr oductandtransf
ert helabourf
orceto
i
ncreaseproduct
ionofboththeot
herpr
oduct
s.Itisest
imatedthatthesavi
ngoffi
xed

9
costsdirect l
yattr
ibut abl
etotheGammapr oductwillbethesameast headditi
onalfi
xed
costsdi rectlyattributabl
et ot he i
ncreased production ofthe Al
pha and the Beta
products.
Thedi r
ectl abourelementi ncludedintheorigi
naldraftbudgetedfi
guresisasfoll
ows:
Alpha:N390, 000 Bet a:N130,000 Gamma:N160, 000
Itisanticipatedt hatN120, 000oft het r
ansferr
edl abourwi l
lswit
cht oproducingthe
Alphapr oductandt heremaindertoproducingtheBet aproduct.I
tisexpectedthatthe
cost/sel
lingpr i
cer elati
onshi
psoft heAlphaandt heBet aproduct
swillremai
nconstant.

Requir
ed:
a.A cr i
ti
cal anal
y si
s of each of t he opti
ons under examinati
on clearl
y
demonstrati
nganyef f
ectont heprofi
tofthecompany.Stat
eanyassumpt ions
made.
b.Prepareashortreportfort
heboardofGr eenPlcsummari
zi
ngy ourfi
ndingsi
n“a”
andrankingtheoptionsinorderofpref
erence.

SELLORPROCESSFURTHER
Iftheor ganizationalpr oduct i
onpr ocessi nvolv
esmor et hanonest ageandt hef i
nished
produceofeachst agehasamar ketv alue,Managementmaybecont emplatingwhet her
i
twi l
lbepr ofitabletosel latt heear li
erst ageofpr oduct i
onorpr ocessf urther.Taking
suchadeci sionr equirest heappl icationofmar ginalcost ingt echnique,wher et he
i
ncr ement alcostofpr ocessi ngf urtherwi llbecompar edwi t
hi ncrement alincome.I f
i
ncr ement alincomei shi ghert hant hei ncrement alcost ,itwi l
lbeadv i
sablet opr ocess
furtherandv i
cev isa.Thekeyt ot hecor rectdeci sioni st oonl yconsi derthedi ff
erences
betweent heal ternativecour sesofact ion.Fol lowi ngt hisdeci si
onr ule,thej ointcosts
arenotr el
evantbecauset heywi llnotbedi ff
er entr egar dl
essoft hedeci siont osellat
thespl i
t-offpointort opr ocesst hepr oduct sbey ondt hispoi nt.Thedeci sionshoul dbe
basedonacompar isonoft headdi ti
onalmar ketv aluecr eatedbyf urt
herpr ocessing,
witht headditional costr equiredbey ondt hesplit-
of fpoi nt .

ILLUSTRATI ON1-Qual i
tyIndust r
iesNi ger i
aLt disachemi calmanuf acturingcompany ,
producingj ointproductsnamel yA,BandC.Ccanbef urtherprocessedt opr oduce
anotherpr oductD.Ther esultofar ecentr esearch carri
ed outbyt hecompany ’s
l
abor at
or ydepar tmentindicatest hatt heycanpr ocessD f urt
hert opr oduceanot her
productE.
Anexami nationoft hecompany ’
sr ecor dsshowst hatthej ointcost sofpr oductionof
productsA, BandCar eN800, 000andt hesel l
i
ngpr i
cesar eA=N12, B=N10, C=N15,
D=N25andE=N30.Undernor malpr oduct iont hecompanycanpr oduce30, 000uni ts
ofA, 20,000uni tsofBand10, 000uni t
sofC.Fur therprocessingofCwoul dy i
eld10,000
unitsofDi ffurtherprocessed8, 000uni tsofEwoul dbepr oduced.
The addi ti
onalcost s ofpr oduct i
on i ff urt
herpr ocessesar e under t
aken woul d be
N70,000f orpr oductDandN40, 000f orpr oductE.
Youar er equiredt oprepareast atementf orpr esentati
ont omanagement ,t
oi ndicate
clearl
ywhet herCshoul dbef urtherpr ocessedandi fso,towhatst age,ifpr ofi
tist obe
maxi mized.

ILLUSTRATI
ON2-TheRay mondCompanymanuf act
uredthr
eejoi
ntpr
oductsataj
oint
costofN600,
000.Thesepr
oduct
swer
eprocessedfur
therandsol
dasfol
lows-

10
 Pr
oduct Sale(N) Addi
ti
onal
processi
ngcost(
N)
X 400,000 100,
000
Y 700,000 320,
000
Z 300,000 130,
000
1,400,000 550,
000

I
ft he company had pur sued it
s opportuni
tyto sel
latspl i
t-
offdir
ectl
yt o other
processors,sal
eswoul dhavebeenX=N250, 000,Y=N400,000andZ=N100, 000.
Thecompanyexpect st ooperateatt hesamel evelofproduct
ionandsal esint he
fort
hcomingy ear.
Considerallavai
lableinfor
mation,andassumet hatal
lcostsi
ncurr
edafterspli
t-
offare
vari
able.Whichpr oductsshoul
dbepr ocessedfurt
herandwhichshoul
dbesol datsplit
-
off?

ACCEPTANCEORREJECTI
ONOFSPECI
ALORDERORSPECI
ALPRI
CING
DECI
SION

Theselli
ngpr i
ceofgoodsandser vi
cescanbedet er
mi nedusingeithermargi
nalor
absorpt
ion costing techni
que.Which oft he t
echni
que t o use depends on the
organi
zationpol
icyandt hemarketf
actor
s?Belowisabri
efr ev
iewpri
cingmethodusing
eachoft hetechniquewhi l
ein-
dept
hknowledgeofthet opicwil
lbediscussedlat
erin
thi
stextunderprici
ngdecision.

MARGI
NALCOSTI
NGTECHNI
QUEFORPRI
CINGDECI
SION

Usingt hist echniquef orpri

cingdecisi
on,t hepri
ceat t
achedt ogoodsandser vi
ceswi ll
bedet er minedaf tert akeni ntoconsiderati
ont herelevantcosts( i
.e.v ar
iabl
ecost s,
oppor t
uni t
ycost ,relev antfi
xedcostandsav i
ngs)untowhi chcontri
butionwillbeadded.
Thiscont ributionwi llbedet erminedbasedont helevelofcompet i
ti
on,t heleveloft he
producti nt hepr oduct ’sli
fecy cl
e,natureoft hemar ketort ypeoft heof f
ers.The
met hodi fusedef fectively
,wi l
lensur
et hatthefutureori ncr
ementalcost sofpr oducts
orser vicesar er ecov er
edpl usar easonablecont r
ibuti
on,af t
erdueconsi derati
onof
abov equal i
tativefact ors

MERI
TS

1.I
tprov i
desabet terbasisforshort-t
erm deci
sion-making.
2.Morecont ractscouldbewonusi ngthismethodbecausei toffer
scompet iti
veprici
ng.
3.I
tav oidst heneedt oarti
fi
cial
lyallocat
eamongpr oduct
s,ashar eoff ixedindirect
costs.
4.I
tisausef ulmethodofset t
ingpricesinacompet it
iveenvi
ronment .
5.I
tisusef ulforsett
ingpriceforproductatdif
ferentstagesintheproductl
ifecycle.
6.I
tencour ages acceptance ofa speci alcontractand on t he long-
run leads t o
maximi zati
onofpr ofit
.

DEMERI TS
1.The method encourages l
ow pr
ici
ng and on t
he l
ong-
run f
ullcostmaynotbe
recov
er ed.
2.I
noligopoli
sti
cmarkets,cut
ti
ngpr
icecl
osetovari
abl
ecostmayleadtosi
mil
aract
ion
11
bycompet
it
orswit
htheresultthatnoonebenefi
tsexceptthecustomers.
3.
Themethoddi
scouragespricestabi
l
ity.
4.
Theremaybedif
fi
cult
yinshakingofflowpri
ceproducti
onwhent r
adeimpr
oves.
5.
Themethoddoesnotguaranteeadequater
eturnoninvestment.

ABSORPTI
ONCOSTI
NGTECHNI
QUEFORPRI
CINGDECI
SION

Usingthistechni queforpr
icingdeci sion,thepr
icetobeat tachedt ogoodsandser vi
ces
wil
lbedet ermi nedbycumul ati
ngorsummi ngupthehi st
oricalcostpl usfuturecost
,or
vari
abl
ecost sandabsor pti
onoff ixedcost spl
usmar ginormar k- up.Thiswillbeinli
ne
wit
hmanagementpol i
cy.
Theav eraget otalorful
lcostswillbet headdit
ionofproduct i
onsand/orr elatedcosts.
Thiswillincluder el
evantandi r
relev ant,fi
xedandv ar
iablecost s,pastorf uturecosts.
Themar ginormar kupwillbeaddedt oav er
agecostasest ablishedf r
om t herouti
ne
costi
ngmet hodt oarri
veatanappr opriatesel
li
ngpri
cef orgoodsandser v
ices.

I
LLUSTRATI
ON

Amanuf act
uri
ngcompanyhasr ecent
lyreceivedanorderfrom aspeci
alcust
omerto
produce2,
000unitsofproductXforN300,
000.
Thecompany ’
sf i
nanci
alaccountanthaspr eparedthefol
lowingst
atementbasedon
absorpt
ioncost
ingmet hodont hebasi
sofwhi chtherej
ectionoft
heorderhasbeen
recommended.

12
Thef
oll
owi
ngaddi
ti
onal
det
ail
swer
epr
ovi
ded

1.
Materi
alA:
-Thi
smat eri
ali
scurrent
lyheldi
nstockatabookv al
ueofN2.00perkg,
but
i
tisknownthatt
hef utur
epurchasewi l
lcostN2.75perkg,andnetreal
i
zableval
ueis
N10.
20perkg.Mater
ialAisinconti
nuoususe.

2.Mater
ialB:
-Origi
nal
purchasepri
ceofthi
smater
ialal
soheldi
nstockisN5.
00perl
it
re.
Thecurrentpri
ceisN3.00perl i
tr
e.Ift
hismat
eri
alisnotusedforthi
sorderi
tcanbe
soldext
ernal
lyforN1.
50perlit
reasithasnoot
herint
ernal
use

3.Mat
erialC:
-Thi
swasorigi
nall
ypur
chasedf
orN9.00peruni
t.I
tisofnousetot
he
companyandwoul dotherwisehavetobedisposedoffatacostofN2, 000tot
he
manufacturi
ngcompany
.

4.
Materi
alD:-Thi
sisnoti
nst
oreandt
hecostst
atedi
stheest
imat
eitcoul
dbebought
fr
om out
side.

5.Gr
ade1- l
abour
:-Thi
sgradeoflabouri
scurr
entl
ybusyonot
herworkandt
her
efor
ea
repl
acementwoul dhavetobeobt ai
nedatarateofN6perhourfort
heworkwhich
wouldotherwi
sebedonebythisgradeofl
abour
.

6.
Grade2–l abour
:-Thi
sgradeoflabouri
scurrent
lyi
dle.Theymustber et
ainedduet
o
di
ff
icul
tyi
nrecrui
ti
ngthi
sspecial
gradeoflabourwhentheyareneeded.

7.
Grade3–l abour
:-Thi
sgradeofl
abourisessent
ial
l
ymadeupofcasualwor
ker
swho
ar
ehiredwhenneededattherat
est
atedintheesti
mate.

8.
Vari
abl
eOverheads:
-Thecompanyabsor
bsv
ari
abl
eov
erheadont
hebasi
sofl
abour
hour
satther
ateofN5perhour.

9.
FixedOver
heads:
-Thi
sisalsonor
mal l
yabsorbedonthebasisofdi
rectl
abourhours
attherat
eofN6perhour.Iti
showeverbel
ievedthati
fthi
scontr
acti
sundert
aken,the
fi
xedcostwoul
dincr
easefort
hedur
ationofthecontr
actbyN21,
000.

10.Inv i
ew oft he f
actthatthe pr
oducti
ve capaci
tyoft he companyi sli
mited,
acceptanceofthecontr
actwoul
dnecessi
tatecutt
ingbackonthelevelofpr
oduct
ionof
otherproduct
sproducedbythecompany.Itisest
imatedthatthi
swouldleadtoaloss
ofN50,000.

Youar erequi
redt
or edraf
tthefi
nanci
alaccountant
’sst
atementinthel
i
ghtofthe
addit
ionalf
act
savail
ableandrecommendwhet hertheordershoul
dbeaccept
edor
rej
ected.

OPTI MALPRODUCTMI X
I
namul ti
-productorganizati
on,wher esomeoral lt
hepr oductareusingthesame
resources,questi
onsalway sarise,onwhatquant i
tyofeachpr oductt
oproduceinorder
tomaxi mizepr ofi
torot herwiseat t
ainthesetobj ect
iveoft heorgani
zati
on.Inother
words,opt i
malpr oductmi xi st hedeterminati
onoft heeconomi calorprofi
tabl
eor
optimalcombi nati
onofpr oductsi namul t
i-
productorgani
zati
onwher eallt
heproducts

13
areusingt hesamer esources.Resour cesher eref
ertothe4m’sofmanagement ,thatis,
man-hours,mat eri
als,machi nehour sandmoney .Inoptimalproductmi xweequal l
y
t
h
considermar ketcapacityast he5 m.Ther efor
e,whenanor ganizationispr oducing
vari
ouslinesofpr oductst hatar eshar i
ngt hesameman- hour,machi nehour ,mat eri
al,
fundandmar ket
,itisimper ativ
eforsuchanor gani
zati
ontodet er
minet heunitsofeach
productt o produce and sel lin ordert o maximize t
he organization’s profi
t.The
avail
abil
i
tyorot herwiseoft heseresour ceswil
lbetakenintoconsi derati
oni nor derto
know whi chpr i
ncipl
eorappr oacht ouse,t oarri
veatopt i
malsol uti
on,andf orthis
purposest hr
eesituati
onsar eal waysconsi der
ed.Theyare:
Whent hereisnoconst rai
nt.
Whent hereisoneconst rai
nt .
Whent herearetwoormor econst r
aints.

WHENTHEREI SNOCONSTRAI NTConst r

aintisl i
mi tat
ionorr est
ri
cti
oni nthesuppl yor
availabi
li
tyofr esources.I norderwor ds, whent hequant ityoft heresourcesav ail
ableis
l
imi t
edandwi llrestr
ictfurtherproductionoft hepr oduct .
Ifthereisanyor gani
zat i
ont hatisoperat i
ngwi t
houtr estri
ctionorconst rai
ntinanyofi ts
resources,thent heopt i
mum mi xwillbet ocont inuepr oduci ngthepr oductasf aras
thosepr oductsar egi venpositivecontributi
on.Thi si srecommended, becauset hemor e
thecont ri
buti
on, t
hemor ethepr ofi
t.
Inpr acti
calsi t
uat i
ons,t herei srarelynoor ganizationt hatcanoper atewi t
houtany
const r
aint.I
tispr actical
lyimpossi bleforanor gani zati
ont ooper atewithabundantand
l
imi t
lessman- hour s,machi nehour s,mat er
ials,fundandmar ketatthesamet ime.Itcan
thereforebest atedt hatthei deaofanor ganiz at
ionoper atingwithoutaconst r
aintis
mor eoft heoreticalt
hanpr act i
cal.

WHENTHEREI SONECONSTRI ANTWhent hereisli

mitati
oni nthesupplyorav ai
labi
lit
y
ofoneoft her esourcesthatanorganizati
onusef orit
spr oducti
onsorsal es, oneoft he
resourceshasmaxi mum quant i
tyav ai
labl
ef oragi ven per i
od and hinder sf urt
her
productionandsal es.Iftheli
mitat
ionisexperiencedonlyononer esource,then, t
hereis
oneconst r
aintandopt i
mum al l
ocati
oncanbedonet hrought heuseof“ cont r
ibuti
onper
keylimitingfactor”.Thelimit
ingorrestri
cti
ngf act
orwillbethatr esour
cet hatisl i
mited
i
nquant ity.

CONTRI
BUTI
ONPERKEYLI
MITI
NGFACTOR

Thi
si scont ri
buti
onperameasur eoft her esourcethati sli
mi t
ed,whichmayr estri
ct
fut
uref urtherpr oducti
onandsal esofpr oducts.Usingt hemet hodmayr equi
ret he
fol
lowi
ngst eps.
a.Cal cul atethe contri
buti
on mar gin orperuni toft he compet i
ng productby
deduct i
ngthev ari
ablecostperuni tfrom theuni tsell
ingpricesorasmaybe
otherwi sederi
ved.
b.Det ermi netheperuni trequirementoft hel i
miti
ngf actorortheresourcethatis
l
imitedi nquantity
.
c.Comput ethecont ri
buti
onperl imit
ingf actorbydividi
ngt hecontri
buti
onmar gin
peruni t
,asstat
edi n“a”abov e,
bythel i
mi ti
ngfactorperunit,asmentionedin“b”
abov e.
d.Rankt heproduct,inorderof ,t
hehi gherthecontributi
onperkeyl imi
tingfact
or,
thehi ghertheranking.Thatis,r
ankinginor derofprofi
tabil
it
y.

14
 e.Pr epareall
ocati
ontabl
eandallocat
etheav
ailabl
eresour
cesamongt hepr
oduct
s
i
nor derofranki
ngasin“d”above.
f. Recommendopt i
mum mix,basedontheal
locati
ondonein“e”abov
e.

I
LLUSTRATI
ONI
:Thef
oll
owi
ngdet
ail
sar
eav
ail
abl
eregar
dingt
hreepr
oductl
i
nes:

Pr
oduct
s L(
N) M(
N) N(
N)
Sel
l
ingpr
ice 100 150 200
Di
rectmat
eri
als(
N2/
li
tr
e) 10 56 45
Di
rectLabour(
N4/
hr) 40 22 60
Vari
abl
eoverheads 20 11 30
Vari
abl
eoverheadsar erecov
eredont
hebasi
sofN2/
dir
ectl
abourhour
.Tot
alf
ixed
over
headsar
eN200, 000.
Youar
erequi
redt
orankeachoft
hepr
oductl
i
nesont
hef
oll
owi
ngassumpt
ions:
a.Salesisali
miti
ngfact
or
b.Mat er
ial
isali
miti
ngfactor
c.Labourisali
miti
ngfactor

I
LLUSTRATI
ONI I
:RESOLUTION(NI
G.)LTDmanuf act
urespr
oduct
sW,X,Y,Z,
allof
whi
chhave100%importcont
entf
ormateri
als.Thebudgetf
ort
hemonthofApri
l2022
i
sgiv
enasfoll
ows:

W X Y Z
N N N N
Dir
ectMat er
ial
s 32 60 60 30
Dir
ectLabour 12 18 12 12
PeriodCosts 4 12 12 6
Profit 36 30 56 27
Sales 210,
000 264,
000 420,
000 202,
500

Thebudgetmaynotbeachi evedbecauset hecompanynowf acesshor t

ageoff undst o
i
mpor tther
equir
edr aw materi
als.Basedoni t
’scashf low pr ojectionwhi chhasbeen
preparedusingtheav er
ageexchanger at
ef orthepastt womont hs,thecompanycan
onlyaf f
ordt
opurchaseN452,000wor t
hoft herequir
edmat eri
al s.
Thecompany ’smanagementhasdeci dedt opr oduceatl east2, 000uni t
sofeach
productandt hebalanceofthefundi fanyt obeut il
izedfort hepr oductst hatgi
vet he
highestcont
ribut
iontothei
rprofi
ts.Youar erequir
edt o:
(a)Advisemanagementont hequant i
ti
esoft heproducttopr oduce.
(b)Preparet
heRev i
sedIncomeSt at
ementshowi ngt heTotalPr ofi
t sfrom eachpr oduct
basedon1( a)above.
ILLUSTRATION III
-Ori
ginalCar
petManuf act
uri
ng Li
mited pr
oducesthr
eet y
pesof
carpet
,Red,BlueandGreen.Thethr
eebrandsofcarpetaremadef r
om aspeci
alfi
ber
i
mpor t
eddirectl
yfrom t
hesolesuppli
erinEurope.Asar esul
tofscarci
tyoffor
eign

15
exchange,suppli
esofthef i
berhavebeendi sr
uptedanditnow seemsl i
kelythatt
he
companywi llbeunabl
etoobt ai
nnotmor ethanhalfofi
tsnormalrequi
rement sint
he
comingy ear
.Thebudgetforthecomingyearhadbeenpreparedbasedont hefoll
owi
ng
i
nformationprovi
dedbysalesandproduct
ionstaff
:

Youarerequiredto:Advisetheboardont hebestmi xofproduct

st oproducef
ort
he
comingyearinthel
ightoftherest
ri
ctedavail
abi
l
ityofspeci
alfi
ber.
Prepar
ear ev
isedbudgetforthecomingyearonthebasisoftheadvicegi
ven.

I
LLUSTRATION IV Carl
ton– Gat
ePlcpr oducesfourpr
oduct
s,A,B,C andD.The
oper
ati
ngbudgetfort
hemonthofJanuar
y,2001isstat
edbel
ow:

Theoper ati
onoft hecompanyi spur elymachi nedr i
venandcanonl ybeexpandedt o
provi
deaddi t
ional400hour s.Thecompanyenv isagesincreasei ndemandofit
spr oduct
tothet uneof50% i nt heforth-comi ngmont hduet of esti
viti
esbuthasproblem of
i
ncreasingitsmachinecapaci tybey ondt henewcapaci ty
.
Inordert ocopewi ththedemandupsur ge,i
thasmadear r
angementwi t
hit
sf oreign
suppli
erstot akecareoft hepr oductionshor t
fallatthefoll
owi ngsuppl
ier
s’pr
ices:Aat
N520,BatN700, CatN300andDatN300.
Youarer equiredt
oadv icethecompanyont hemaxi mum pr of
ititcanmake:
a.Ifthesuppliersfailt
ohonourt heagr eement
b.Ifthesuppliersarecer t
aint ohonourt heagr eement.

WHENTHEREARETWOORMORECONSTRAI
NTS

I
namul
ti
-pr
oductor
gani
zat
ion,
wher
ethev
ari
ouspr
oduct
soft
hecompanyar
eshar
ing

16
orusingthesameresourcesandther
earelimi
tationsintheav ai
l
abil
it
yorsupplyoftwo
ormor e ofi
tsresour
ces,a mor e adv
ance technique call
ed “Li
nearProgramming
Technique”isusedtodet er
minetheoptimum/ prof
itabl
e/economicalcombinat
ionof
products.

17