Parkel makes two products, the Azax and the Xephon. Unit variable costs are the following:

	Azax	Xephon
Direct materials	2	3
Direct labour (4 per hour)	4	2
Variable overhead	1	1
TOTAL	7	6

The sales price per unit is 12 per Azax and 10 per Xephon. During the relevant month the available direct labour is limited to 6,000 hours. Sales demand for the month is expected to be as follows:

Azax	9,000 units
Xephon	6,000 units

Fixed costs for the month are 15,000 and there is no opening or closing inventory of finished goods or work in progress.

You have been asked to determine the production budget for the month that will maximise profits.

• a.Confirm, by use of a relevant calculation, that the limiting factor is not sales demand.
• b.Identify, by use of a relevant calculation, the contribution earned by each product per unit of the limiting factor.
• c.Determine the budgeted production to maximise profit and calculate the profit for this production plan.
• d.Explain why determining the production plan based on contribution per unit would not result in maximum profit.
• e.Consider the situation of a manufacturer that has three products and limited sales demand for each of these products. The business has two scarce resources, direct materials and direct labour. Given the situation identified, explain the procedure the manufacturer would take to produce a profit-maximising budget.

Answer rating: 100% (QA)

Parkel Production Budget Analysis a Sales Demand as a Limiting Factor To confirm whether sales demand is the limiting factorwe need to compare availab... View the full answer