Engineering Cost Analysis
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Q1: (Maximising returns to a limiting factor).A company manufactures 2 injection-moulded models of a product, ‘Small’ and ‘Large’. The Small model has total variable costs of €16, and the Large model has total variable costs of €20. The company prices its products by ‘marking-up’ its variable costs by 50%. The company’s net injecting-moulding capacity is limited to 420 hrs / month., and this capacity can be used for producing either product. The ‘Small’ can be moulded at the rate of 70 / hr, while the ‘Large’ is moulded at the rate of 30 / hr. The maximum number of products which can be sold each month is 21k Small models, and 10k Large models.What combination of the 2 products should the company focus on selling / month in order to maximise its profits?……………………………………………………………………………………Q1 Solution: The limiting factor is the machine-hours:SmallLargeVariable Cost / unit€16.00€20.00Sale Price / unit€24.00€30.00Contribution / unit€8.00€10.00Units produced per hour7030Contribution per ‘Machine Hour’€560.00€300.00Concentrate on selling / producing the Small model because it produces a higher contribution per machine-hour, which is the limiting factor.Maximum demand for Standard = 21k units, which require 21k / 70 m/c hours = 300 hours; – leaving balance of 420 – 300 = 120 hours capacity for the Large unit.Sell the 120 hrs remaining capacity of 120*30 = 3,600 Large units.Cont’d/ …Solution 1 continued:Commercial considerations:Can machine output rate be improved? – or include more cavities in the mould for the Large model?What might be the effect on sales of the Small product if supply of the Large model is restricted to 3,600 units / month?Can the contribution of the Large model be improved? (Increase the price and / or lower the VC).Q2: (Product profitability).A company is reviewing its product profitability performance for the last year. While they manufacture only one product, it is supplied in 3 models, viz: ‘Utility’, ‘Standard’, and ‘Deluxe’. The Accountant has compiled the following cost information for the year:
Product ModelUtilityStandardDeluxeAnnual Sales in units10,0006,0004,000Price per unit (€)150200300Direct Materials (€)80100195Direct Labour (€)162040Fixed Overheads absorbed (€)4050100Total cost (€)136170335Net Profit / (Loss) per unit (€)1430(35) Analyse these figures with particular reference to the loss-making Deluxe product. Q2 Solution:Compile a summary Profit Statement for the year.Sales Revenue€€10,000 Utility @ 1501,500,0006,000 Standard @ 2001,200,0004,000 Deluxe @ 3001,200,000Total Sales Revenue3,900,000Direct Variable Costs10,000 Utility (80 + 16) @ 96 960,0006,000 Standard(100+20) @ 120 720,0004,000 Deluxe (195+40) @ 235 940,000Total variable Costs2,620,000Contribution1,280,000Fixed Costs Absorbed10,000 Utility @ 40400,0006,000 Standard @ 50300,0004,000 Deluxe @ 100400,000Total Fixed Overheads1,100,000Profit 180,000