Illustration
P Ltd. produces two products and the following particulars are available regarding them:
Fixed overheads budgeted Rs.2,00,000
Total direct labor hours available 4,00,000.
The company does not want to reduce the production of product P below 1,20,000 units and of product Q below 4,00,000 units. Assume that materials are freely available and can be freely used with direct labor for either of products subject to the minimum production as stipulated above.
Suggest the best production program by outlining the steps, along with the statements for the purpose, and show the net profit expected from this program.
Solution
Calculation of Contribution
|
S No.
|
Particulars
|
Product P (Rs.)
|
Product Q
(Rs.)
|
|
1.
|
Sale price
|
24.00
|
14.00
|
|
2.
|
Variable cost:
|
|
|
|
|
Direct material cost
|
12.00
|
8.00
|
|
|
Direct labor cost @ Rs.8 per hour
|
8.00
|
4.00
|
|
|
Variable overhead @ Rs. 2 per hour
|
2.00
|
1.00
|
|
3.
|
Marginal cost
|
22.00
|
13.00
|
|
4.
|
Contribution (1 - 3)
|
2.00
|
1.00
|
|
5.
|
Labor hours
|
1
|
0.5
|
|
6.
|
Contribution per labor hour (4 / 5)
|
2.00
|
2.00
|
Contribution for labor hour rate is same for either products, and excess labor hours can be used for any product or both products partly.
|
Particulars
|
|
Hours
|
|
Total hours available
|
|
4,00,000
|
|
Less: Labor hours required for minimum production program
|
|
|
|
For 1,20,000 units of product P @ 1 hour per unit
|
1,20,000
|
|
|
For 4,00,000 units of product Q @ 1/2 hour per unit
|
2,00,000
|
3,20,000
|
|
Labor hours available to be used for any product
|
|
80,000
|
If 80,000 labor hours are used for product P, then the production will be as follows:
|
Particulars
|
Product P
|
Product Q
|
|
Units
|
Units
|
|
Minimum production
|
1,20,000
|
4,00,000
|
|
When 80,000 labor hours are used for production P @ 1 labor hour per unit
|
80,000
|
-
|
|
Production
|
2,00,000
|
4,00,000
|
Calculation of Profit for the Above Production Program
|
Particulars
|
Amount
Rs.
|
|
Contribution on 2,00,000 units of product P @ Rs.2 per unit
|
4,00,000
|
|
Contribution on 4,00,000 units of product Q @ Re.1 per unit
|
4,00,000
|
|
Total Contribution
|
8,00,000
|
|
Less: Fixed Overheads
|
2,00,000
|
|
Profit
|
6,00,000
|
If 80,000 labor hours are used for product Q, the production program will be as follows:
|
Particulars
|
Product P
Units
|
Product Q
Units
|
|
Minimum production
|
1,20,000
|
4,00,000
|
|
80,000 labor hours used for product Q @ 0.5 labor hour per unit
|
|
1,60,000
|
|
|
1,20,000
|
5,60,000
|
Calculation of Profit on the Second Production Program Rs.
|
Contribution on 1,20,000 units of product P @ Rs. 2 per unit
|
2,40,000
|
|
Contribution on 5,60,000 units of product Q @ Re.1 per unit
|
5,60,000
|
|
Total contribution
|
8,00,000
|
|
Less: Fixed overheads
|
2,00,000
|
|
Profit
|
6,00,000
|
From the above, it is clear that the net profit for the suggested programs is same because contribution per labor hour, the limiting factor, is the same for each product.
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