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Posting this because i think there is a mistake made in kaplan solution kit.
In this question we are required to calculate the mix (units) of products A and B which will maximize 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 variable overhead expenses.
Ok does not matter how much we produce actually i got it the fixed production overheads does not change but the variable production overhead cost vary with production.so why the real production values of 144000 and 13000 were not used instead?There is no mistake, and you are obviously not watching my free lectures, because I explain this very point in the lectures – you really cannot expect me to type them all out here!!
Unless told otherwise we assume that the costings were prepared before we knew about the constraints. Therefore they were done assuming that we produced to meet full demand. So we can calculate the total fixed overheads using the budget figures, and this total will not change even though they end of producing fewer units.
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