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- This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
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- January 24, 2018 at 3:01 pm #432660
Hello,
I would be grateful if you please could explain the reason for the answer to Q3 of the CBE Dec 16 on the ACCA website (please see below). I though that the reduction of the material costs of product Z would also improve the company’s TPAR? Many thanks.A manufacturing company decides which of three mutually exclusive products to make in its factory on the basis of maximising the company’s throughput accounting ratio.
Current data for the three products is shown in the following table:X Y Z
Selling price per unit $60 $40 $20
Direct material cost per unit $40 $10 $16
Machine hours per unit 10 20 2.5Total factory costs (excluding direct materials) are $150,000. The company cannot make enough of any of the products to satisfy external demand entirely as machine hours are restricted.
Which of the following actions would improve the company’s existing throughput accounting ratio?Increase the selling price of product Z by 10%
Increase the selling price of product Y by 10%
Reduce the material cost of product Z by 5%
Reduce the material cost of product Y by 5%
Solution:
As all three products are mutually exclusive the company would choose to make X as it has the highest throughput return per hour of $2.Of the four possible options only increasing the selling price of product Z by 10% would give a higher throughput return per hour of $2.40.
January 24, 2018 at 3:44 pm #432671They can only make 1 product and therefore at the moment they will make X and the TPAR will be 2.00.
So, things will only change at the company will only make a higher TPAR if they made one of the other products and that were giving more then 2.00.
Increasing the SP of Z by 10% would result in Z giving a TPAR of 2.4, and so they would make Z instead and so the company’s TPAR would then be 2.4.
Reducing the material cost of Z by 5% will increase Z’s TPAR to 1.92. But it would still be best for the company to make X with a TPAR of 2.00, and so the company’s TPAR would stay at 2.00.
January 24, 2018 at 3:55 pm #432672Thank you John, it makes sense.
For some reason I thought they would aim to make two best products.
Thank you for your prompt response.
January 25, 2018 at 7:38 am #432847You are welcome 🙂
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