Limiting Factor analysis — OpenTuition Forums

JJohann11y ago

Hi professor First of all thanks for all the great material you are leaving on this website it is helping thousands of students gain a stronger knowledge on the subject and therefore will helping them be more prepared in taking their exams. Have a question on BPP revision kit mock exam 2 Metallica LTD. The first two products have their respective selling prices listed so it is easy to derive the contribution per unit. However products C3 and C4 have no selling price listed. The suggested solution has used the opportunity cost (the buy in price) deducted the variable costs and arrived at the contribution per unit. Why did he use the opportunity cost? if we use the buy in price that would be a cost and not revenue and so costs cannot be used to derive contribution.Also by deducting the other variable costs(if we make the product in house) wouldn't we derive the extra variable costs if units are bought from outside? Appreciate if you can explain as it seems I am missing something. Thanks in advance Johann

John MoffatTutor11y ago#1

C3 and C4 are not sold - they are used elsewhere - and so do not have a selling price. However by making them themselves they are saving having to buy them externally, which is why (for C3 for example) making it themselves costs $44 per unit, which saves them paying out $75 - so a net saving of $31. It is not really a contribution (because we are not selling anything) but for the purposes of deciding how best to use the limited material it is effectively the same. Using material to make our own C3 saves them $124 per sq meter whereas using the material to make P4 (for example) earns us $93.33 per square meter. So just between those two it would be better to use it to make C3 than P4.

JJohann11y ago#2

Thanks professor much appreciated. On another note is imperfect information examinable?

John MoffatTutor11y ago#3

You are welcome :-) (and no - not calculations on imperfect information)

Ssan10y ago#4

Sir , how to calculate m2 of m1/ unit in this question metallica 0.75,0.5 thanks in advance

John MoffatTutor10y ago#5

The cost of M1 is $15 per unit product P4. The question tells you that Material M1 costs $20 per sq metre The each unit of P4 must use 15/20 = 0.75 sq metres of Material M1. The same workings for the other products.