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December 8, 2016 at 10:07 am #362190jforrest19
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Hello,
Hoping you could help me with a question on the pearson CIMA P1 mock please.
Company produces 3 products from a raw material that is in short supply. Standard cost of raw material is $0.50 per kg.
Product A Product B Product C
Maximum sales demand 1000 2400 2800
Planned production (units) 720 0 2800Contribution per unit 4.5 4.8 2.95
Raw material per unit 2.5kg 3kg 1.5kgA new supplier has been found to supply a further 1000kg if material.
What is the maximum amount the company should pay for additional 1000kg of material?
Answer is $2,240 – but there’s no workings for pearson mocks.
Initially I worked out contribution per limiting factor, but don’t understand how they came to this answer (usually find limiting factor questions easy).
Thanks
JamesDecember 9, 2016 at 12:44 am #362496CathModerator Topics: 0
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Hi, Thanks for your question.
Ok – so this is a limited factor problem which shows the optimum production plan has been already been based upon a correct ranking of contribution per limited factor.
1000 kg of extra material would enable you to make additional units of Product A (which is the 2nd ranked product and has unfulfilled demand) – so instead of 720 units you would be able to make all 1000 units demanded (so 280 units more of product A @2.5kg per unit uses 700kg of the extra materials) and then you would use the remaining 300kg of the extra material to make as many as you could of product B which at 3kg per unit would enable you to make 100 units of B.
We don’t know what the cost of the extra material is so we cant work on contribution per unit figures for this part of the analysis – instead we need to find the extra revenue that would be generated from selling 280 extra units of A and 100 units extra of product B. – therefore, we need to find selling prices for these products.
We are told that the original material was 0.50 per kg – so we can find the standard material cost per unit for each product. Then using the contribution per unit which is given – we can find the selling price.
So for product A each unit uses 2.5kg of material at 0.50 per kg costing $1.25 – so if contribution per unit is $4.50 then selling price of A must be $5.75
For product B – similarly 3kg of materials cost $1.50 per unit and therefore selling price must be $6.30.
The extra 1000kg allows us to make 280 units more of product A which at $5.75 each brings in $1610 extra revenue.
And we can make 100 units of product B which at $6.30 each will bring in $630 extra revenue.
The total extra revenue that 1000kg additional materials would provide = 1610 +630 = $2240.
So $2240 is the absolute maximum we should pay for this amount of extra material.Hope that explains ok
Kind Regards
Cath 
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