Assignment Case Study:
Khaboura Manufacturing makes three products, A, B, C the 'Gadget', the 'Midget' and the 'Widget'. Each of the products requires the use of labor and of materials, including a special material, 'Material X'. Manufacturing labor is equally capable of working on all three products. Demand for all three products has increased strongly over recent months and is expected to remain high. Information about the products, relating to the near future, is as follows:
|
Description
|
Product A
|
Product B
|
Product C
|
|
Material X usage (meters per product)
|
55
|
25
|
20
|
|
Manufacturing labor (minutes per product)
|
40
|
35
|
50
|
|
Selling price (OMR per product)
|
20
|
16
|
20
|
|
Other Materials (OMR per product)
|
1.5
|
1
|
1
|
|
Expected Demand (units per week)
|
200
|
500
|
200
|
Material X costs the business 0.100 OMR a meter and the manufacturing workers are paid 8 OMR an hour. The manufacturing workers are all employed on contracts that guarantee all 12 of them a 40-hour week (that is, the manufacturing workers are paid 320 OMR a week, irrespective of the amount of work carried out). There are no other employment costs associated with the workers. It is not possible to expand the staff by employing other manufacturing workers and the existing ones are unwilling to work overtime.
Material X is in short supply and only 30,000 meters a week are expected to be available for the near future. The business holds no inventories of Material X. Supplies of it are received at the beginning of each week. The business incurs manufacturing overheads that are believed to be partially fixed and partially variable with manufacturing labor time. During two recent consecutive weeks, this cost totaled 2,700 OMR in Week 1 and 3,010 OMR in Week 2.
Production output for those two weeks was as follows:
|
Description
|
Product A
|
Product B
|
Product C
|
|
Week 1
|
150
|
320
|
160
|
|
Week 2
|
150
|
380
|
180
|
There have not been, nor are there expected to be in the near future, any price changes, either of sales prices or of cost elements.
Required: As a Senior Cost Manager in the Company, you are required to:
1. Evaluate whether it is the current level of staffing or the supply of Material X that will force the company not to meet the expected demand for the products.
2. Estimate the optimal quantity of each product that the business should produce each week.
3. Estimate the maximum amount that the business should be prepared to pay as an overtime rate to the manufacturing workers, should any of them be prepared to work extra hours.
4. Estimate the maximum amount that the business should be prepared to pay for any additional quantities of Material X.
5. Suggest steps the business might take to improve its profitability in the near future.
Reference: Atrill, P. and McLaney, E. (2018) "Management Accounting for Decision Makers". 8th Edition, Pearson Education Limited, London.
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