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Example 1 – Theory of Constraint (Urgent)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Example 1 – Theory of Constraint (Urgent)

  • This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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  • Author
    Posts
  • February 1, 2017 at 1:59 am #370445
    nzrn89
    Participant
    • Topics: 37
    • Replies: 15
    • ☆☆

    Hi, Could you please help me with one quick query on the below question with solution? Having tough time figuring it out, sure am missing something. How in the world do we arrive at Additional Sales from current position, for example: Buy C & B is getting additional sales of 150 units; buying C, B&A is getting additional sales of 250 units? Appreciate your help! Shouldn’t buying C, B & A lead to additonal sales units of 200 and not 250??

    Example 1 – Theory of constraints
    Demand for a product made by P Ltd is 500 units per week. The product is made in three consecutive processes – A, B, and C. Process capacities are:

    Process

    A

    B

    C

    Capacity per week

    400

    300

    250

    The long-run benefit to P Ltd of increasing sales of its product is a present value of $25,000 per additional unit sold per week.

    Investigations have revealed the following possibilities:

    (1) Invest in a new machine for process A, which will increase its capacity to 550 units per week. This will cost $1m.
    (2) Replace the machine in process B with an upgraded machine, costing $1.5m. This will double the capacity of process B.
    (3) Buy an additional machine for process C, costing $2m. This will increase capacity in C by 300 units per week.

    SOLUTION:

    Financial viability

    Buy C

    Additional Sales = 50

    $000

    Benefit = 50 × $25,000

    1,250

    Cost

    2,000

    –––––

    Net cost

    750

    Buy C and B

    Additional sales from current position = 150

    $000

    Benefit = 150 × $25,000

    3,750

    Cost ($2m + $1.5m)

    3,500

    –––––

    Net benefit

    250

    Buy C, B and A

    Additional sales from current position = 250

    $000

    Benefit = 250 × $25,000

    6,250

    Cost ($2m +$1.5m +$1m)

    4,500

    –––––

    Net benefit

    1,750

    The company will benefit by $1,750,000 by investing in all three machines.

    February 1, 2017 at 8:33 am #370471
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 51538
    • ☆☆☆☆☆

    Please do not write ‘urgent’ against questions – it will not get you an answer any quicker (we do not sit at the computer 24 hours a day!!).

    If they buy A, B, and C, then the capacity in A will be 550, in B will be 600, and in C will be 550.
    Therefore the maximum production capacity will be 550.
    However the demand is only 500 and so they would be stupid to produce 550 and will therefore produce 500.

    Currently the maximum production is 250, and therefore being A, B and C will increase sales by 500 – 250 = 250.

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