Reference no: EM13340532

Theory of Constraints

AB Manufacturing Co. Ltd produces two products, A and B.  Both products require machining, and assembly and packaging.  Total material cost and labour and machining requirements per unit are as follows:

 

	Product A	Product B
Direct material Direct labour Machining time	$3.00 15 min 60 min	$3.00 30 min 30 min

 

Last year's costs for the production of 20 000 units of A and 40 000 units of B were as follows:

 

Direct material	$180 000
Direct labour	$250 000
Overhead	$280 000
Total costs	$710 000

 

Overhead costs were all fixed costs. The following data were derived in respect of overhead costs.

 

Overhead   Activity	Overhead   Cost	Cost   Driver	Cost   Consumption Driver
			Product A	Product B
Machining Setups Receiving Packing	$140 000 45 000 35 000 60 000	Machine hours Number Setups Number Receipts Number Orders	20 000 100 300 800	20 000 50 200 400
	$280 000

 

Overhead costs and output are expected to be the same this year as last year. This year maximum sales will be 20 000 units of A and 40 000 units of B.

Required:

(a)  Assuming that each activity's cost pool is allocated using a separate cost driver as indicated above, calculate the total overhead to be allocated to one unit of each product.

(b)  Assume that this coming year machining will be a bottleneck resource with only 30 000 hours per annum available.  Both products sell for $15 per unit.  Based on the TOC philosophy, determine the appropriate product mix for this year which will maximise annual profits.