BKAM3023 Management Accounting II

Topic 5: Short Term Decision Making

Exercise 5

Bakker industries sells three products (products 611, 613, and 615) that it
manufacturers in a factory consisting of four departments (departments 1 through 4).
Both labor and machine times are applied to the products in each of the four
departments. The machine processing and labor skills required in each department are
such that neither machines nor labor can be switched from one department to another.

Bakker’s management is planning its production schedule for the next several months.
There are labor shortages in the community. Some of the machines will be out of
service for extensive overhauling. Available machine and labor time by department for
each of the next six months is listed below.

Department

Monthly Capacity Available 1 2 3 4

Normal machine capacity in 3,500 3,500 3,000 3,500

machine hours

Capacity of machines being (500) (400) (300) (200)

repaired in machine hours

Available machine capacity in 3,000 3,100 2,700 3,300

machine hours

Labor capacity in direct labor 4,000 4,500 3,500 3,000

hours

Available labor in direct labor 3,700 4,500 2,750 2,600

hours

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Labor and Machine Specifications Per Unit of Product

Department

Product Labor and Machine Time 1 2 3 4

611 Direct labor hours 2 3 3 1

Machine hours 2 1 2 2

613 Direct labor hours 1 2 0 2

Machine hours 1 1 0 2

615 Direct labor hours 2 2 1 1

Machine hours 2 2 1 1

The sales department’s forecast of product demand over the next six months is
presented below.

Product Monthly Sales Volume

611 500 units

613 400 units

615 1,000 units

Bakker’s inventory levels will not be increased or decreased during the next six months.
The unit price and cost data valid for the next six months are presented below.

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Product

Item 611 613 615

Unit costs:
Direct material $7 $13 $17
Direct labor
Department 1 $12 $6 $12
Department 2 $21 $14 $14
Department 3 $24 $0 $8
Department 4 $9 $18 $9
Variable overhead $27 $20 $25
Fixed overhead $15 $10 $32
Variable selling and administrative $3 $2 $4
Unit selling price $196 $123 $167
78 40 46
96 52 82

Required:

(a) Determine whether the monthly sales demand for the three products can be met
by Bakker Industries’ factory. Use the monthly requirement by department for
machine hours and direct labor hours for the production of product 611, 613, and
615 in your calculations.
Labor and Machine Specifications Per Unit of Product

Department

Product Labor and Machine Time 1 2 3 4

611 Direct labor hours 1,000 1,500 1,500 500

Machine hours 1,000 500 1,000 1,000

613 Direct labor hours 400 800 0 800

Machine hours 400 400 0 800

615 Direct labor hours 2,000 2,000 1,000 1,000

Machine hours 2,000 2,000 1,000 1,000

TOTAL DLH 3,400 4,300 2,500 2,300

MH 3,400 2,900 2,000 2,800

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(b) What monthly production schedule should Bakker Industries select to maximize
its dollar profits? Support the schedule with appropriate calculations, and present
a schedule of the contribution to profit that would be generated by the production
schedule selected.
611>613>615
Labor and Machine Specifications Per Unit of Product

Department

Product Labor and Machine Time 1 2 3 4

611 (750) Direct labor hours 1,500 2,250 2,250 750

Machine hours 1,500 750 1,500 1,500

613 (500) Direct labor hours 500 1,000 0 1,000

Machine hours 500 500 0 1,000

615 (500) Direct labor hours 1,000 1,000 500 500

Machine hours 1,000 1,000 500 500

TOTAL DLH 3,000 4,250 2,750 2,250

MH 3,000 2,250 2,000 3,000

Item 611 613 615

Forecasted Sales Revenue 147,000 61,500 83,500
Variable (77,250) (36,500) (44,500)
CM 69,750 25,000 39,000
Fixed OH (11,250) (5,000) (16,000)
58,500 20,000 23,000

(c) What other alternatives might Bakker Industries consider to be able to supply its
customers all the products they demand?