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Dear John,
In this q we are required to calculate the mix (units) of products A and B which will maximise net profit and the value of that net profit.
Production/sales of A and B 120000 and 45000.
Max demand for each product is 20% above estimated sales level.Flopro has decided to determine the profit maximising mix of products A and B based on the Throughput accounting principle of maximising the throughput return per production hour of the bottleneck resources.
I have no problem to calculate the throughput return per bottleneck hour and to calculate the mixture of A and B for max profit.
My question is regarding the value of net profit.
In the solution when the throughput return per product is calculated we used the max demand in units for A (144000) and the rest of the available hours in units for B which is 13000 units.
But then the overhead calculation used the original units’ amount such as 120,000 and 45,000 to deduct the overhead expenses.Could you please explain it why?There is no explanation in the solution and I can’t find anything similar in my text book.
Thanking you in advance.
Kind regards,
Katalin
II explain this very point in my free lectures – I do suggest you watch them because I am not going to type them all out here 🙂
The lectures are a complete free course for Paper F5 and cover everything needed to be able to pass the exam well.We assume that the budgets were prepared before knowing about the limit on hours, and were therefore based on producing to meet maximum demand. The total budgeted fixed costs will not change even though the actual production ends up being lower.
Dear John,
I’ve listened to your lecture twice already. I am going to listen to them again 🙂 I might missed that point somehow 🙁
I understand that the fix cost is not changing.
My question was about why the max demand units is used to calculate the contribution and then the original sales/demand unit amount was used to calculate the variable cost…Thanks again.
Kind regards,
Katalin
It is as I wrote in my previous post.
We assume that when the original costings were prepared they did not know about the limited hours. Therefore they will have done the costings based on producing to meet the maximum demand. So you use this to calculate the total fixed overheads, and the total remains the same even though they end up producing less.
Variable costs on the other hand do vary with the actual production.
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