LIMITING FACTORS

QUESTION 1

(a) A company manufactures three products, Pawns, Rooks and Bishops. The
present net annual income from these is as follows:
Pawns Rooks Bishops Total
¢ ¢ ¢ ¢
Sales 50,000 40,000 60,000 150,000
Less variable costs 30,000 25,000 35,000 90,000
Contribution 20,000 15,000 25,000 60,000
Less fixed costs 17,000 18,000 20,000 55,000
Profit/loss 3,000 (3,000) 5,000 5,000
The company is considering whether or not to cease selling Rooks. It is felt
that selling prices cannot be raised or lowered without adversely aff ecting
net income. ¢5,000 of the fixed costs of Rooks are direct fixed costs which
would be saved if production ceased. All other fixed costs would remain
the same.
(b) Suppose, however, that it were possible to use the resources released by
stopping production of Rooks to produce a new item, Crowners, which
would sell for ¢50,000 and incur variable costs of ¢30,000 and extra
direct fixed costs of ¢6,000.
REQUIRED
Consider whether the company should cease production and sale of Rooks under each of the
scenarios in (a) and (b) above.

QUESTION 2

The availability of Material B is limited to 8,000

kg
Product X Y Z

Demand (units) 2,000 2,500 4,000

Variable cost to make ($ per unit) 10 12 14

Buy-in price ($ per unit) 13 17 16

Kg of B required per unit 3 2 1

(included in variable cost)
Which products should the company make and which should it buy?

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QUESTION 3

(a) Koboko Co Ltd is a busy processing company which has increased its output and sales
from 12,800 kg in the first half of the year 2010 to 14,490 kg in the second half of
2010. Even though demand is still rising, it cannot increase its output more than
another 5% from its existing labour force.

Information in the second half of 2010 for its four products were:

A B C D
GHS GHS GHS GHS
Output (kg) 3,460 5,860 3,270 1,900
Selling price (GHS per kg) 17.30 12.48 10.24 12.72
Costs (GHS per kg):
Direct materials 7.48 5.10 5.0 6.12
Direct labour 1.84 1.20 1.0 1.65
Direct packing 0.91 0.69 0.54 0.80
Fixed overhead 3.84 2.45 2.12 2.94
14.07 9.44 8.66 11.51

Okee Ltd has offered to supply 2,000 kg of product B at delivered price of 85% of
Koboko Ltd product B selling price. The company (Koboko Ltd) will then be able to
produce extra product A in place of the outsourced quantity of 2,000 kg out of product
B, up to the plant’s total capacity.

Required:

State whether Koboko Ltd should accept Okee Ltd’s offer. (10 marks)

(b) A company located in the Free Zone enclave is faced with resource constraints. As a
result of the technical nature of its operations, the monthly labour hours are limited
to 175,000 hours. The supplier of raw materials has also been adversely affected by
the recent climate change who has promised to supply 60,000 units of the materials
monthly.

Details on the products are as follows:

A B C D
GHS GHS GHS GHS
Selling price per unit 60 45 50 65
Direct materials cost unit 15 10 10 15
Direct labour cost unit 20 16 16 24
Variable overhead 12 8 10 11

Direct materials required per unit 3 2 2 3

Direct labour hours required 5 4 4 6

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 The demand for the products are as follows
A = 10,000 units B = 6,000 units C = 12,000 units and D = 8,000 units.
It is the company’s policy to produce and sell at least 3,000 units of each product
every month.

Required:

Advise management on the most profitable production mix and ascertain the most
optimum profit expectation if the fixed costs of the month amount to GHS240,000.
(10 marks)
QUESTION 4

TarGet plc has four divisions. The income statement for the year ended 2018 was presented by the
Financial Accountant

Division A B C D Total
GHS GHS GHS GHS GHS
Sales revenue 86,000 92,000 102,000 110,000 390,000
Cost of sales 64,000 72,000 80,000 94,000 310,000
Gross Profit 22,000 20,000 22,000 16,000 80,000
Selling & Administrative Cost 8,000 6,000 12,000 18,000 44,000
Net income 14,000 14,000 10,000 (2,000) 36,000

Notes to the accounts

i) Specific cost of sales are A GHS 9,000, B GHS 12,000, C GHS 11,000 and D GHS 13,000

ii) Variable cost of sales is 50% of sales revenue

iii) Variable selling and Administrative cost is 5% of sales revenue

Management is proposing to close division D on the basis of poor performance. It is believe that when
Division D is close the resources could be used to increase the revenue of Division C by 40%. when sales
in a Division increases more than 25%, specific fixed cost will increase by 20%.

Required

a) Based on quantitative factors advice management whether to retain or close.

b) Identify four (4) qualitative factors that should be considered in taking such decisions.

QUESTION 5

Dolow produces computer component A for sale at GH47 per unit to a Manufacturer of
computers. The company currently produces 15,000 units of the component per annum.

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Total cost of production and unit cost are as follows:

Production Cost Unit Cost

GHC GHC
Direct materials 210,000 14
Direct labour 180,000 12
Variable production cost 30,000 2
Fixed manufacturing overhead 150,000 10
Share of non-production overhead 105,000 7
675,000 45

A supplier has offered to supply 15,000 units of the components per annum at a price of
GHC39 per unit over a four-year period without any change in price.

If Dolow accepts the offer, the following are the effects on current operation.

(1) Direct labour will be redundant but at a redundancy cost of GHC5,000.

(2) Direct materials and variable production cost will be avoidable
(3) Fixed manufacturing cost will be reduced by GHC18,750 per annum
(4) Share of non-production overhead cost will stay as it is.

Assuming further that, the extra capacity for accepting the contract offer from the supplier can
be used to produce and sell 15,000 units of component Z at a price of GHC43 per unit with
the following assumptions:

(1) All of the labour force required to manufacture component A will be used to make
component Z.
(2) Variable manufacturing overhead will remain same.
(3) The fixed manufacturing overhead will remain same.
(4) Non-manufacturing overhead will be the same.
(5) The materials for component A will not be needed but additional materials at a cost of
GHC15 per unit will be required for production.

Required:

(a) Should Dolow make or buy component A?

(10 marks)

(b) Should Dolow accept the offer and use the available space to manufacture component
Z?
(10 marks)
COMPILED BY TARGET 0507380935/ 0546738172
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