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Profitability of limiting factor

2. (Scarce resources) Jan Spears Ltd. Manufactures four different products. Because the quality of the products are high, the demand for the product exceeds the units Jan Spears Ltd. Can produce.

Based on the enquiries made by current and potential customers, you have estimated the following for the coming year:

Estimated Direct Direct
Demand in Selling Price Materials Labor
Product Units Per Unit Cost/per/unit Cost/per/unit
A 8,000 $50 $5 $5
B 24,000 60 10 9
C 20,000 150 25 30
D 30,000 100 15 20

The following information is also available:
- The direct labor rate is $15 p/h and the factory capacity of 80,000 hours. For the next year Jan Spears Ltd. Is unable to expand its capacity.
- Jan Spears Ltd. Is unwilling to increase its selling prices
- Apart from direct materials and diret labour, there are no other variable expenses except for variable overhead. The variable overhead is 50% of direct labour cost.
- Fixed manufacturing overhead is estimated to be $1,000,000 for the coming year. Fixed marketing and administrative expenses are estimated to be $750,000 for the coming year.

Which products and how many of each should Jan Spears Ltd. Produce in the coming year in order to maximize its operating income.


Solution Summary

The answer contains computation of contribution per limiting factor ( direct labour hours) and ranking the product on the basis of profitability per limiting factor.