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Dear Tutor,
I am trying to solve some exercises to get prepared to my Management Accounting exam but I am struggling with this one.
A company manufactures and sells two products (X and Y) both of which utilise the same skilled labour. For the coming period, the supply of skilled labour is limited to 2,000 hours. Data relating to each product are as follows:
Product X Y
Selling price/unit £20 £40
Variable cost/unit £12 £30
Skilled labour hours/unit 2 4
Maximum demand (units) per period 800 400In order to maximise profit in the coming period, how many units of each product should the company manufacture and sell?
A) 200 units of X and 400 units of Y
B) 400 units of X and 300 units of Y
C) 600 units of X and 200 units of Y
D) 800 units of X and 100 units of YThe solution is D but, actually I answered A.
I computed the contribution for both products which is £8 for X (£20-£12) and £10 for Y (£40-£30) and then, since Y has the greatest contribution, I would produce as much as possible (so 400 units) of Y and then I would saturate the remaining labour hours with 200 units of X. Where’s my mistake?Thank you.
You have asked this in the Paper F2 forum, but it is not in the syllabus for Paper F2 – it was removed many years ago and is only asked now in Paper F5 !!!
Either you have posted in the wrong forum, or you are using a very old book to study from.Products are ranked according to their contribution per hour, since labour is the limited resource.
Product X generates a contribution per hour of $8/2 = $4. Product Y generates a contribution of $10/4 = $2.50 per hour.
Therefore you would produce as many units of X as possible.This is key factor analysis and is all explained in the first part of my free lectures on throughput accounting.
The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well. Similarly (if you are actually studying for Paper F2), the F2 lectures are a complete course and cover everything needed to pass that exam well.
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