Question 1

a. Internal manufacturing cost of component P

$

Direct labour 8.00

Direct material B (2 x 5) 10.00

Variable overhead: The buying price of component

Labour related [1.25/(20/ 8)] 0.50 component P internally if resou
Machine related (1.25/5) x 0.5 0.13 scarce in the next 10 weeks, the
18.63 with the contribution that can b

Product
Resource
J K L M
Material A (W2) 2,200 3,700 - 14,250
Material B (W3) 2,200 - 8,850 19,000

It can be seen above that material B is a binding constraint and so the contributions from each product and th
product K does not use the scare material, it can be omitted.

J L M Component P
Product
$ $ $ $
Selling price / Buying
56.00 78.00 96.00 35.00
cost
Less: Variable cost
Direct labour 20.00 24.00 20.00 8.00
Direct material A 6.00 - 9.00 -
Direct material B 10.00 15.00 20.00 10.00

Variable overhead:
Labour related 1.25 1.50 1.25 0.50
Machine related 1.25 0.75 1.00 0.13
Total variable cost 38.50 41.25 51.25 18.63
Contribution/ unit 17.50 36.75 44.75 16.38

Material B/ unit (W3) 2.00 3.00 4.00 2.00

Contribution/ kg 8.75 12.25 11.19 8.19
Production Ranking 3rd 1st 2nd 4th

Since component P has the lowest ranking, WZ should continue to purchase the component from the externa
manufacture products L,M and J.
 Working 1: Weekly demand of products
Product
Maximum weekly J K L M
demand 1,000 3,500 2,800 4,500
Additional demand 100 200 150 250
Total weekly demand 1,100 3,700 2,950 4,750

Working 2: Weekly demand of material A

Product
Material cost per J K L M
product 6 3 - 9
Price per litre 3 3 3 3
Material per unit
Total weekly demand 2 1 - 3
of products
Total weekly demand 1,100 3,700 2,950 4,750
of material 2,200 3,700 - 14,250

Working 3: Weekly demand of material B

Product
Material cost per J K L M
product 10 - 15 20
Price per kilogram 5 5 5 5
Material
Total per unit
weekly demand 2 - 3 4
of products
Total weekly demand 1,100 3,700 2,950 4,750
of material 2,200 - 8,850 19,000

b. Optimum weekly usage of material B Material B per Material used Total material B
unit (kg) (kgs) remaining (kg)
Available material B 24,000

Contract units:
Product L 150 units 3 450
Product M 250 units 4 1,000
Product J 100 units 2 200 (1,650)
Normal weekly 22,350
demand:
Product L 2,800 units 3 8,400 (8,400)
13,950
Product M 3,487.5 units 4 13,950 (13,950)
0
The decision to purchase component P would change if the additional cost of buying component is equal to t
c. i. material B.
From the weekly production plan, product J is only manufactured to satisfy the contractual demand. The lowe
for "normal" weekly demand is from product M.
 Product M has a contribution per kg of $11.19 which is $3 per kg higher than from component P. As each uni
have to be $6 (2 x $3) per component higher to have the same rank as product M. Therefore, the buying price

c. ii. Employee
WZ shouldskill level whether the employees have the necessary skill level to produce component P. If not, WZ
consider
ensure the components are of appropriate quality.

Control
WZ may prefer to control/ oversee the production of component P and may not wish to be dependent on a thi
adequate quality. In this case, WZ should take steps to enable component P to be manufactured internally.

d. Maximise contribution (c) = 17.5J + 18.0K + 36.75L + 44.75M, subject to the following constraints:
2J + 1K + 0L + 3M ≤ 21,000 Material A supply
2J + 0K + 3L+ 4M ≤ 24,000 Material B supply
 (a)

ying price of component P is $35 per unit, so the company should manufacture
nent P internally if resources are readily available as it is cheaper. As resources are
n the next 10 weeks, the comtribution from the component needs to be compared
e contribution that can be earned from the other products.

Surplus /
Component P Total Available
(Shortfall)
- 20,150 21,000 850
1,000 31,050 24,000 (7,050)

rom each product and the component per kg of material B must be compared. As

ponent from the external supplier so that the available resources can be used to
 Component P
- (as per question) (b)
500
500

Component P
-
3
-
500 (c)(i)
-

Component P
-
5 (c)(ii)
2
500
1,000

component is equal to the lowest contribution from the products produce that use

actual demand. The lowest contribution (per kg) for products manufactured to cater
mponent P. As each unit of P uses 2 kgs of material B then the buying price would
erefore, the buying price at which the decision would change is $41 ($35 +$6)

component P. If not, WZ should purchase the component from external suppliers to

to be dependent on a third party for delivering component P on time and with

nufactured internally.

g constraints:
Tutor Ans
Product J K L M
Maximum demand 1,100 3,700 2,950 4,750

Material A per unit (liter) 2 1 0 3

Total material A required 2,200 3,700 0 14,250

Since there is a surplus of 850 liter of Material A after fulfilling the maximum demand, Material A is not a limiting factor.

Product J K L M
Maximum demand 1,100 3,700 2,950 4,750
Material B per unit (kg) 2 0 3 4
Total material B required 2,200 0 8,850 19,000

Since there is a shortfall of 7,050 kg of Material B for production, Material B is the limiting factor.

Component P
$
Cost of buying 35.00
Cost of making

Direct labour 8.00

Direct material B 10.00

Variable overhead:
Labour related 0.50
Machine related 0.13 18.63

Additional cost of buying

16.38

Based on the above, as it is cheaper to make, the company appear to be better off to make than to buy. However, buying P will a
the company to fully utilise the available Material B for the production of other products. Further analysis is required.

Product J L M Component P
Contribution 17.50 36.75 44.75 16.38
Material B per unit (kg) 2.00 3.00 4.00 2.00
Contribution per kg of
8.75 12.25 11.19 8.19
material B
Production ranking 3rd 1st 2nd 4th
Based on the above computation, as the additional cost of buying component P is lower than the additional contribution earned
making J, L and M, the company should continue buying component P from its supplier.

Production Plan Material B per

Product Quantity unit Total Material B
L 2,950.00 3.00 8,850.00
M 3,737.50 4.00 14,950.00
J 100.00 2.00 200.00
K 3,700.00 0.00 0.00
Available 24,000.00

To calculate the increase in purchase price of Component P that make it to be very expensive to buy.
Component P will be made when it becomes too expensive to buy. In order to make P, Product M will need to be sacrified. The
additional cost of buying can increase by RM 3 (net contribution earned from buying P and making M) per kg. Since 1 componen
requires 2 kg of B, therefore, the purchase price can increase to RM 35 + RM 6 = RM 41.

Quality of component P purchased

Goodwill of suppliers
 Component P
500

0 20,150
Available 21,000
Surplus 850
Material A is not a limiting factor.

Component P
500
2
1,000 31,050
Available 24,000
Shortfall (7,050)

ake than to buy. However, buying P will allow

. Further analysis is required.

Additional cost of buying P

Extra 2 kgs of material B
Additional cost of buying P to
release 1 kg of material B for the
AAA
r than the additional contribution earned from

pensive to buy.
Product M will need to be sacrified. The
nd making M) per kg. Since 1 component P
Question 2
Dropping flight
$
Loss in contribution due to dropping flight (12,950)

Add: Savings in avodiable costs

Flight promotion 750
Fuel for aircraft 5,800
Liability insurance (4,200/ 3) 1,400
Salaries, flight assistants 1,500
Overnight costs for flight crew & assistants 300
Net operating loss (3,200)