AUBAIN Ltd manufactures a range of baths which it distributes to the market exclusively through a major hypermarkets. The products have been developed over many years of trading and cover all the sectors of the market - from the Basic model to the Gold model. Fabrice Foolchand, the company's sales and marketing director, has been carrying out an extensive market research exercise with the assistance of his team. The following demand, selling price and cost structure have been forecast for the coming year: Basic Standard Silver Gold Demand (units) 3.900 2 100 3 800 Selling Price (per unit) Rs650 Rs725 Rs850 4 100 Rs950 Costs (per unit) Rs Rs Rs Rs Materials 100 150 300 350 Variable Manufacturing 220 310 290 360 Share of Fixed Costs 150 250 150 220 However, Fabrice has real concerns that the company will be unable to reach the necessary levels of manufacturing output to keep up with the forecast demand. In particular, there has been a recent history of industrial relations problems which have cut the effective operating capacity. Mr Krishen, the Human Resource (HR) manager, is aware of this risk and has made provision for the recruitment of some sub-contract labour to cover such problems. The following information is also available: 1. 2. 3. 4. 5. The company employs 40 highly skilled staff in bath manufacture with a maximum annual capacity of 70 000 direct labour hours. During the last financial year, industrial action resulted in the loss of 20% of that capacity. In planning for the new financial year, it is recognised that further industrial action remains a possibility. The HR manager has negotiated a further 7000 hours of capacity to be provided by sub-contract labour over the coming year. Variable manufacturing costs include both labour costs and variable manufacturing overhead. Variable manufacturing costs are incurred at a rate of Rs50 per direct labour hour. Fixed overhead is shared across the products, according to the space occupied by the work-in-progress for each product line. Required: (a) Identify and quantify the limiting factor on the company's ability to meet the expected demand for the year ahead. (b) [6 marks] Devise the optimal production plan for the year ahead and compute the expected level of profits arising from the implementation of this plan.

AUBAIN Ltd manufactures a range of baths which it distributes to the market exclusively through a major hypermarkets. The products have been developed over many years of trading and cover all the sectors of the market - from the Basic model to the Gold model. Fabrice Foolchand, the company's sales and marketing director, has been carrying out an extensive market research exercise with the assistance of his team. The following demand, selling price and cost structure have been forecast for the coming year: Basic Standard Silver Gold Demand (units) 3.900 2 100 3 800 Selling Price (per unit) Rs650 Rs725 Rs850 4 100 Rs950 Costs (per unit) Rs Rs Rs Rs Materials 100 150 300 350 Variable Manufacturing 220 310 290 360 Share of Fixed Costs 150 250 150 220 However, Fabrice has real concerns that the company will be unable to reach the necessary levels of manufacturing output to keep up with the forecast demand. In particular, there has been a recent history of industrial relations problems which have cut the effective operating capacity. Mr Krishen, the Human Resource (HR) manager, is aware of this risk and has made provision for the recruitment of some sub-contract labour to cover such problems. The following information is also available: 1. 2. 3. 4. 5. The company employs 40 highly skilled staff in bath manufacture with a maximum annual capacity of 70 000 direct labour hours. During the last financial year, industrial action resulted in the loss of 20% of that capacity. In planning for the new financial year, it is recognised that further industrial action remains a possibility. The HR manager has negotiated a further 7000 hours of capacity to be provided by sub-contract labour over the coming year. Variable manufacturing costs include both labour costs and variable manufacturing overhead. Variable manufacturing costs are incurred at a rate of Rs50 per direct labour hour. Fixed overhead is shared across the products, according to the space occupied by the work-in-progress for each product line. Required: (a) Identify and quantify the limiting factor on the company's ability to meet the expected demand for the year ahead. (b) [6 marks] Devise the optimal production plan for the year ahead and compute the expected level of profits arising from the implementation of this plan.

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter20: Inventory Management: Economic Order Quantity, Jit, And The Theory Of Constraints

Section: Chapter Questions

Problem 17E

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