Question

Benkhadour Co. manufactures four different products. Because the quality of its products is high, the demand for them is greater than the company can satisfy.

Based on the inquiries made by current and potential customers, you have estimated the following for the coming year:

Product	Estimated Demand in Units	Selling Price per Unit	Direct Materials Cost per Unit	Direct Labour Cost per Unit
A	8,000	$  50	$  5	$  5
B	24,000	60	10	9
C	20,000	150	25	30
D	30,000	100	15	20

The following information is also available:

• 1.The direct labour rate is $15 per hour and the factory has a capacity of 80,000 hours. For the next year, Benkhadour is unable to expand this capacity.
• 2.Benkhadour is unwilling to increase its selling prices.
• 3.Apart from direct materials and direct labour, the only other variable expense is variable overhead. The variable overhead is 50% of the direct labour cost.
• 4.Fixed manufacturing overhead is estimated to be $1 million for the coming year. Fixed marketing and administrative expenses are estimated to be $750,000 for the coming year.

Instructions

Determine which products and how many units of each Benkhadour should produce in the coming year in order to maximize its operating income.

Produce 11,467 units of C

Answer 1

Working Note 1:- Direct Labour Hours per Unit

Particulars

A

B

C

D

labour Hrs Per unit (A)

5

9

30

20

Cost per Labour hr (B)

15

15

15

15

labour hrs per unit( A / B)

0.3333

0.60

2

1.33

Working Note 2 :- Calculation of cost per unit and Cost per labour hrs

Particulars	A	B	C	D
SP	50	60	150	100

Material Cost

(5)

(10)

(25)

(15)

Labour Cost	(5)	(9)	(30)	(20)
Contribution Per Unit	40	41	95	65

DLH Pu

0.3333

0.60

2

1.3333

Contribution per Labour Hr

120

68.3333

47.50

48.762

Ranking

I

II

IV

III

Demand

8000 Units

24000 Units

20000 Units

30000 units

Hours required (Demand * DLH Pu)

2667

14400

40000

40000

Allocable Hrs

2667

14400

22933

40000

Units to be produced

8000

24000

11467

30000

Working Note 3 :- Calculation of Operating Income

Particular

A

B

C

D

Total

Units to be produced

8000

24000

11467

30000

contribution Per Unit

40

41

95

65

Total Contribution

240000

984000

1089365

1950000

4263365

Fixed Manu- -facturing Expenses

(1000000)

Marketing and Administrative Exp.

(750000)

Total Profit

2513365