Dandelion plc is a start-up that manufactures Product X and Product Y. The products go through five
Question:
Dandelion plc is a start-up that manufactures Product X and Product Y. The products go through five stages of processing before the product is ready for sale. The first and second stages require labour hours, whereas the final three stages of the production process require machine hours. Dandelion needs to produce 20,000 units of Product X and 16,000 units of Product Y each month. The number of skilled labour hours required to produce 20,000 units of Product X is 5,000 hours, and the number of skilled labour hours required to produce 16,000 units of Product Y is 4,000 hours. Currently, the company has 75 skilled workers. Each skilled worker does 100 hours of work that requires their specific skills in a month. In the remainder of their working hours, they are assigned work that can be done by unskilled labourers. All the work is required to produce Product X and Product Y. The products processed by skilled workers will go through Machine A, then Machine B and finally Machine C. The table below shows the data regarding the time required by Machine A, Machine B and Machine C to process 20,000 units of Product X and 16,000 units of Product Y:
In a month, Machine A has the capacity to work for 38,000 minutes, Machine B has the capacity to work for 19,000 minutes and Machine C has the capacity to work for 4,000 minutes. Dandelion’s policies dictate that all machines must be used to their full capacity. Dandelion is unable to procure sufficient quantity of a raw material that is required to manufacture both Product X and Product Y. The raw material is unique, and the supplier of this raw material is in a remote location. There are very few substitutes for this raw material. The company needs a substantial amount of time to transport the raw material from the supplier’s location to its own location. The chief financial officer (CFO) of Dandelion is considering introducing throughput accounting as a performance measure to manage the constraints that the company is facing in meeting demand.
Required
1. The CFO of Dandelion plc is considering the introduction of throughput accounting. The theory of constraints solution is to change usual measures by focusing on throughput, inventory and operational expense. Based on the information given below, determine the return on investment (ROI) using throughput accounting formulae. Note that the values given below are for a month.
2. Identify the constraints currently faced by Dandelion plc.
3. Suggest how Dandelion can manage the constraints it is currently facing.
Step by Step Answer:
Management Accounting
ISBN: 9780077185534
6th Edition
Authors: Will Seal, Carsten Rohde, Ray Garrison, Eric Noreen