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A manufacturing company uses machine C, which is operational for five hours a day to manufacture four products: W, X, Y and Z. Factory costs are $150,000 per day.
The company uses throughput accounting and its objective is to maximize profits.
Information relating to these products is as follows:
Products——————————–W——–X——–Y——–Z
Production rate/machine hrs—–200——500—-400—–350
Selling price per unit ($)———–350——190—-270—–215
Material cost per unit ($)———-120——-95—–160——75
Conversion cost per unit ($)——-40——-25——20——-35If the company is not able to increase the availability of machine C’s
operational hours, what is the production ranking of product Y?A. First
B. Second
C. Third
D. Forth[My answer]
The company uses machine C which is operational for 5 hours a day to make four products W, X, Y, Z. So every product is taking 5 hours to produce the products.Products———————————–W———X———-Y———-X
Production units————————200——-500——400——-350
Total Throughput cost ($)———-46000—-47500—44000—-49000
Total Machine hours—————–1000——2500—–2000—–1750
Throughput cost / machine hours–46———19——–22———28
Ranking———————————-1st———4th——-3rd——–2ndAccording to my answer product Y should be made 3rd in ranking but the correct answer is D (4th).
Please explain why my answer is not correct???
It is not how many they produce that matters, it is the speed at which they produce.
The throughout return for W is 350 – 40 = $280.
They can produce at the rate of 200 per hour, and so the throughput return per hour is 200 x $280 = $56,000.
(Or, if you prefer, the time to produce 1 units is 1/200 hours, and therefore the throughput return is 280 / (1/200) = $56,000.It is the same workings for each other the other products.
Have you watched my free lectures on throughput accounting?
Sir, you have deducted the conversion cost from the selling price instead of material cost to get the throughput return for W. It should be this way 350 – 120 = $230
The company produced 200 units for W, therefore the throughput return is 200 x $230 = $46,000. (which I correctly calculated in my answer above)
Since the machine is used for 5 hours a day, we need to calculate the total hours taken by W as 200 x 5 hrs = 1000
Therefore, the throughput return per hour for W is calculated as ($46000 / 1000 hrs) = $46
The same goes for the other products. (Is that correct?)
Sorry, my mistake – you are correct that I should have subtracted the material cost.
The fact that the machine is used for 5 hours a day is not relevant. To get the throughput return per hour we need to divide the throughput contribution per unit by the time taken per unit (as I explain in my lectures on this).
We is capable of producing 200 units per hour, and therefore the throughput return per hours is 200 x $230 = $46,000. That is the return per hour – we do not multiply that by anything.
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