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In section b) (i), calculating the maximum net profit, I don’t understand why the answer takes the variable production overhead cost of £28 for A and £4 multiplied by the initial 120000 and 45000 units and NOT the 144000 and 13000 for A and B respectively as the calculation for the optimal mix.
It has come across similar doubt in other exercise so something I am doing wrong.
Shouldn’t be variable production overheads adjusted to production volume???Many Thanks
AluaThroughput suggest only direct material cost is variable in nature and all other cost i.e (direct labour ,variable overheads and other fixed overheads) are consider fixed costs
throughput/unit = S.P – direct material/unit
thats why the answer takes 144,000 units x $28 for product A and 15,000 units x $4 for direct material calculations because its variable i-e they are changing with the level of activity as throughput implies.
All other costs are fixed therefore 120,000units for product A and 45,000units for product B are being used because they do not change with the level of activity.
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