Management Accounting-CVP Analysis- DAIBB,2015 -7 (b) Math Solution DAIBB Helpline.

Management Accounting-CVP Analysis-DAIBB,2015-7 (b)

A company is capable of producing three different products with the same type of labor and material. The details are:-

	Products
	A	B	C
	BDT	BDT	BDT
Sale price	320	280	360
Direct material (BDT 10 per kg)	140	65	87
Direct labor (BDT 5 per hour)	56	78	116
Variable overhead	28	39	58

Total fixed overhead = BDT 105,000

You are required:

(a) To comment on the priority which should be given to the products when-

(i) Unit sales are limited;

(ii) Sales in value are limited;

(iii) Material is scarce;

(iv) Labor is difficult to obtain.

(b)   To find out the optimum products mix to maximize profit and to    

calculate that profit direct labor hour available are 30,280 and the maximum sales potential is 1,000 units for each product.

Solution : 

	Products		A	B	C
1	Unit Selling Price	BDT	320	280	360
2	Unit Direct Material Cost	BDT	140	65	87
3	Unit Direct Labor Cost	BDT	56	78	116
4	Unit Variable Overhead Cost	BDT	28	39	58
5=2+3+4	Unit Variable cost	BDT	224	182	261
6=1-5	CM per unit	BDT	96	98	99
7=6/1	CM Ratio		0.300	0.350	0.275
8	Maximum Profit Yield	Rank	2	1	3
9	Labor Cost per hour	BDT	5	5	5
10=3/9	Required Labor hour per unit	HOUR	11.2	15.6	23.2
11	Required Available Labor Hour	HOUR	11,200	15,600	3,480
12	Production Allocation	UNIT	1,000	1,000	150
13=5x12	Total Variable Cost	BDT	224,000	182,000	39,150
14=1x12	Total Sales	BDT	320,000	280,000	54,000
15=14-13	Gross Profit	BDT	96,000	98,000	14,850
16	Total Gross Profit (A+B+C)	BDT	208,850
17	Total Fixed Cost (A+B+C)	BDT	105,000
18=16-17	Profit (A+B+C)	BDT	103,850

CM per unit = Unit Selling Price - Unit Variable cost

CM Ratio = CM per unit / Unit Selling Price

Since Product B yields maximum Contribution Margin (35%), then we have to allocate optimum input. i.e., 15,600 hours for 1,000 units. 

Product A yields second highest Contribution Margin (30%), So the allocated labor hour of B is 11,200 hours for 1,000 units. 

Product C yields minimum Contribution Margin (27.5%), So the remaining labor hour of C is 3,480 hours for 150 units. 

Hence Total Labor hour = 15,600 + 11,200 + 3,480 = 30,280.

Therefore, the product mix is 1,000 (A); 1,000 (B) & 150 (C) units which yields profit BDT 103,850.

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