INTEGRATED CASE STUDY

ASSIGNMENT

Q4.

A. Calculate which of the components, K or T, should be produced and sold in the year in
order to maximize profits. You should state the number of units to be produced and sold
and the resulting contribution.

SOLUTION
First of all, we need to calculate the limiting factors. The limiting factors are the
constraints that is preventing the company from producing both components, K and T.
CALCULATIONS OF THE LIMITING FACTORS FOR MATERIAL X (Kg).
Components Kg/unit No. of units Total Kg
K 2 59,200 118,400.00
T 2 80,000 160,000.00
Kg required to produced both components, K and T 278,400.00
Kg available 136,000.00
SHORTFALL 142,400.00
The company (Binta ltd) can’t produce both components because, the company is having
a shortfall of material x of 142,400 kg of material x.

CALCULATION OF LIMITING FACTOR FOR MACHINE HOUR LINE A.

Components Hr/unit No. of units Total Hrs
K 0.25 59,200.00 14,800.00
T 0.15 80,000.00 12,000.00
Machine hr of line A required to produced both components 26,800.00
Machine hr of line A available 13,600.00
SHORTFALL 13,200.00
The company can’t produce both components as they are having a shortfall of 13,200
machine hrs. of line A.

CALCULATION OF LIMITING FACTOR FOR MACHINE HOUR LINE B

Components Hr/unit No. of units Total hrs.
K 0.2 59,200.00 11,840.00
T 0.225 80,000.00 18,000.00
Machine hrs of line B required to produce both components 29,840.00
Machine hrs of line B available 15,360.00
SHORTFALL 14,480.00
The company can’t produce both components because they are having a shortfall in
machine hrs. of line B of 14,480 hrs.
CALCULATION OF NUMBER OF UNITS THAT CAN BE PRODUCED WITH
THE AVAILABLE CAPACITY OF THE COMPANY.
FOR COMPONENT K
Limiting factor Capacity available Hrs/Kg/unit units
Material X 136,000 2.00 68,000.00
Line A 13,600 0.25 54,400.00
Line B 15,360 0.2 76,800.00

The company can produce 68,000 units of component K with the capacity of material x
they are having. But, machine hrs. of Line A required to produce the 68,000 units of
component K is 17,000 hrs. The available machine hrs. of Line A available is 13,600
hrs. which is a constraint of producing the 68,000 units. The 76, 800 units also can’t be
produce because machine hrs. of Line A required to produce it is 19,200hrs. which is not
available as the amount available is only 13,600hrs. of Line A. The company can only
produce 54,400 units as they have the required Kg of material x available, the required
machine hrs. of Line A and the required machine hrs. of Line B. The company can
produce the 54,400 units with an unused material x of (136,000Kg – 108,800Kg)
27,200Kg and unused machine hrs. of Line B of (15,360hrs. – 10,800hrs.) 4,480hrs.

FOR COMPONENT T
Limiting factor Capacity available Hrs/Kg/unit units
Material X 136,000 2 68000
Line A 13,600 0.15 90666.67
Line B 15,360 0.225 68266.67

Based on the resources available, the company should produce 68,000 units of
component T. The company can’t produce either 90,666 units or 68,266 units as the
resource available is not enough to produce those quantities.

Therefore, we conclude that the company can produce either 54,400 units of components
K or 68,000 units of components T.

CALCULATING THE CONTRIBUTION OF EACH COMPONENT

 Components K T
D D
Sales per unit 900 800
Variable cost:
Material cost (50*2Kg) 100 100
Line A W1 125 75
Line B W1 120 135
Contribution 555 490

Wornings
W1. K T
Variable overhead per machine hr
Line A (500*0.25/0.15) 125 75
Line B (600*0.20/0.225) 120 135

Component K is having a contribution per unit of D555 and component T is having a

contribution of D490.

TOTAL CONTRIBUTION OF EACH COMPONENT

Components contr. Per unit units Total contribution
D D
K 555 54,400 30,192,000.00
T 490 68,000 33,320,000.00

CONCLUSION: If the company produce K of 54,400 units they will gain a contribution
of D30,192,000.00 while they will have a contribution of D33,320,000.00 when the
company produces component T. Based on the contributions of the components they
company should produce 68,000 units of component T as it is with the highest
contribution.

B. CALCULATION OF UNUTILIZE HOURS

FOR LINE A COMPONENT K AND T

 Components K T
Machine hrs. Available 13,600 13,600
Machine hrs. utilized:
k 54,400 0.25 13600
T 68,000 0.15 10200
UNUTILIZED HRS. 0 3,400

FOR LINE B COMPONENT K AND T

Components K T
Machine hrs. Available 15,360 15,360
Machine hrs. utilized:
k 54,400 0.2 10880
T 68,000 0.225 15300
UNUTILIZED HRS. 4,480 60
The company will have 0 unutilized machine hrs. of Line A if they produce component K
whiles they will have unutilized hrs. of 3,400hrs. when they produce component T. As
for machine Line B, they will have unutilized hrs. of 4,480hrs. of machine line B whiles
the unutilized machine hrs. will be 60hrs. when they produce component T.

REVISED TOTAL CONTRIBUTION FOR COMPONENT, K AND T.

Components K T
D D
Original contribution 30,192,000.00 33,320,000.00
Additional contr. Due to new sales outlet:
Line A:
K (0*400) - 1,360,000.00
T (3400*400)
Line B:
K (4,480*600) 2,688,000.00
T (60*600) 36,000.00
TOTAL CONTRIBUTION 32,880,000.00 34,716,000.00
Based on the contribution, the company should still produce component T as it has the
highest contribution of D34,716,000.00.

C. WAYS TO OVERCOME THE LIMITING FACTORS (CONSTRAINTS).

 INCREASE THE SUPPLIER’S BASE OF RAW MATERIAL X: On
of the constraints of producing both component, K and T is raw material x.
The company needs 278,400kg of raw material x and the available raw
materials x is 136,000kg. This constraint can be overcome with the
 company increasing the supplier base of the material. This will cost them
additional cost such as the cost of the raw material x and the transportation
cost of the material to the company.

 OUTSOURCING THE PRODUCTION OF COMPONENT K: The

company can’t produce both component, K and T because of its capacity
constraints. Based on the contribution provided by the components, the
company should produce component T as it provides high contribution
than component K. Therefore, for us to overcome the capacity constraint
we can produce component T and outsource the production of component
K. The cost of outsourcing should be consider and other factors like;
timely delivery, which supplier to outsource to and the quality of the work.

 PURCHASE OF NEW MACHINE: Among the capacity constraints is

machine hrs. This can be overcome by purchasing a new machine to meet
the required number of hrs. required to produce both component, K and T.
The company should consider the cost of buying a new machine, the
transportation cost, installation cost and testing cost of the new machine.

D. THE USE OF OPPORTUNITY COST IN CHARGING OF EACH OF

MATERIAL, LABOUR AND OVERHEAD ELEMENTS IN COMPARISON
WITH HISTORIC ABSORPTION COST ELEMENTS

 MATERIAL: In a circumstance where the company is given a project to work on

and the material are available in stock of the company. If the company wants to
use the material for the project they will replace the material at a replacement cost
of D600. The company decided to use the material on the project and later replace
it. The opportunity cost of the material on the project will be the replacement cost
of D600 which will be relevant in calculating the cost of the project.

 LABOUR COST: Let’s consider a case below;

For Example, company x ltd is a construction company and is having a policy of
paying its employees at the end of every month. The basic wage paid to each
employee at the end of the month is D25,000 per month. Each employee received
D6,250 as weekly basic wage which is sum to D25,000 for the whole month and
the amount is paid at the end of the month. Due to some circumstances beyond the
control of company x ltd, the employees are not working. Due to that, the
 company decided to use 2 employees for painting a house for a period of a month
which can equally be performed by outsiders at the cost of D35,000.
From the case, the company will pay a basic wage of 50,000 (25,000 per
employee in month * 2 employees) to the 2 employees whether they work on the
project or not. If the company gives the painting service to outsiders, they will pay
D35, 000 for the service.
The opportunity cost of the painting service is D35,000.

 OVERHEAD: For example, if a company have a machine to work on a project.

The details of the machine are listed below;
D
 Annual depreciation 2,300
 Maintenance cost 3500
 Power cost 2,000

The depreciation amount is a non cash item and is not relevant.

The opportunity cost to be charged to the project is 3,500+2,000 = 5,500.

GROUP MEMBERS:

NAME: MAT#
NYARA NYABALLY 21914035
OUMIE BARROW 21834407
OUMIE BARRY 22014337
OUMIE SEY 22014295
ROHEY YATA NJIE 22114061
ROSE BIJON NASALAN 22013191
RUBBIE BALDEH 22114258
SAIKOU FAYINKE 21834330
SAINABOU JOBE 22014531
SAINABOU A CAMARA 22014316
SAINEY BOJANG 22014354
SAINEY JAITEH 22014401
SANNA SINGHATEH 21834218
SARJO SONKO 22014352
SERAH A TAMBA 22014009
SIRAY JAMMEH 22014558
SULAYMAN SABALLY 22014118
WUDAY DARBOE 22014315
YAMOUNDOW JALLOW 22014119