(a) Hailwood plc makes and sells two products A and B, each of which passes through the
same automated production operations. The following estimated information is available
for period 1:
i. Product unit data: A B
Direct material cost £2 £40
Variable production overhead cost £28 £4
Overall hours per product unit (hours) 0.25 0.15
ii. Production/sales of products A and B are 120,000 units and 45,000 units with
selling prices per unit of £60 and £70 respectively.
iii. Maximum demand for each product is 20% above the estimated sales levels.
iv. Total fixed production overhead cost is £1,470,000. This is absorbed at an
average rate per hour based on the estimated production levels.
Required:
Using net profit as the decision measure, show why the management of
Hailwood plc argues that it is indifferent on financial grounds as to the mix of
products A and B which should be produced and
sold.
(10 marks)
(b) One of the production operations has a maximum capacity of 3,075 hours which has been
identified as a bottleneck which limits the overall production and sales of products A and
B. The bottleneck hours required per unit for products A and B are 0.02 and 0.015 hours
respectively.
Hailwood plc has decided to determine the profit maximising mix of products A and B
based on the Throughput Accounting principle of maximising the throughput return per
production hour of the bottleneck resource. This may be measured as throughput return
per production hour = (selling price – material cost)/bottleneck hours per unit.
Required:
i. Calculate the mix of units of products A and B which will maximise net
profit and the value of that net profit.
(8 marks)
ii. Calculate the throughput accounting ratio for product B which is calculated
as: throughput return per hour of bottleneck resource for product
B/overall total cost per hour of bottleneck resource.
(3 marks)
14 | P a g e
iii. Comment on the interpretation of throughput accounting ratios and their
use as a control device. You should refer to the ratio for product B in your
answer. (4 marks)
iv. Using traditional limiting (or key) factor analysis, calculate the mix of
products A and B that will maximise net profit and explain why your
answer is different to that in (b) (i) above.
(5 marks)
(Total 30 marks)