1.2 Key factor analysis – calculations If there is one limiting factor, then the problem is best solved using key factor analysis where options are ranked using the contribution earned per unit of scarce resource, e.g. if labour is the scarce resource, then rank the different option using contribution per labour hour.
Illustration 1 – Key factor analysis
X Ltd makes three products, A, B and C, of which unit costs, machine hours and selling prices are as follows:
Product AProduct BProduct C
Machine hours101214
$$$
Direct materials @ 50c per kg7 (14kg)6 (12kg)5 (10kg)
Direct wages @ $7.50 per hour9 (1.2 hours)6 (0.8 hours)3 (0.4 hours)
Variable overheads 3 3 3
Marginal cost191511
Selling price 25 20 15
Contribution 6 5 4
Sales demand for the period is limited follows:
Product A4,000
Product B6,000
Product C6,000
Company policy is to produce a minimum of 1,000 units of Product A.
The supply of materials in the period is unlimited, but machine hours are limited to 200,000 and direct labour hours to 5,000
Required:
Indicate the production levels that should be adopted for the three products in order to maximise profitability, and state the maximum contribution.
Solution
Step 1: First determine which is the limiting factor (this may be done for you in examination questions).
At potential sales level:
Sales potentialTotal machineTotal labour
unitshourshours
Product A4,00040,0004,800
Product B6,00072,0004,800
Product C6,00084,0002,400中华考试网(www.Examw。com)
196,00012,000
Thus, labour hours are the limiting factor. |