Intermediate: Optimal output decision using contribution per scarce factor and graphical approach

(a) Discuss the importance of key factors or limiting factors in an organization.

(b) E Limited manufactures two products, K and L, the selling prices of which are £48 and £72 respectively. Standard cost data are as follows:

E Limited operates a 40-hour week for 50 weeks each year.
Currently the employees in each department are:

You are required to state:

(1) if one product only were to be made:
(i) which product would give maximum profit and the problems that you envisage could arise;

(ii) which product should be made and the amount of profit per annum resulting, assuming that products K and L use the same direct material and that there is a shortage of the material with supply limited at current price to a max1mum of £200 000 per annum;
(iii) which product should be made and the amount of profit per annum resulting, assuming that there is a shortage of persons possessing the skills required in department 2, with the result that the number of employees there cannot be increased;
(2) how many of each product should be made and the amount of profit resulting, assuming that the number of employees cannot be increased or transferred from one department to another

Product K Product L () () Per article Direct material 10 12 Direct wages, 4 per hour: Department: 1 8 12 2 4 8