For this assignment you will need to read the information provided below, perform calculations, and...

Question

For this assignment you will need to read the information provided below, perform calculations, and provided an evaluation and analysis of the case.
Smithton, Inc. produces four types of computer chips. Two of these (W and X) are sold by the business. The others (Y and Z) are incorporated, as components, into another of the company’s products. Computer chips Y and Z are not incorporated into either computer chip W or X. The four types of computer chips have the following costings (per unit):

W	X	Y	Z
Variable materials	100	90	80	92
Variable labour	50	30	45	57
Other variable costs	34	10	12	17
Fixed costs	25	18	34	13
Total cost per unit	209	148	171	179
Selling price per unit	250	220

An outside supplier is willing and able to supply unlimited quantities of products Y and Z to the business at a cost of £209 per unit of computer chip Y and £196 per unit of computer chip Z.
Smithton, Inc. has estimated the demand for its computer chips for the upcoming year. For chips W and X, the following is the market demand; for chips Y and Z, the following represents demand from estimated production requirements:
Units
W 6,500
X 5,500
Y 3,700
Z 3,400
Also, production of the computer chips is completed with a specialised machine. Each chip requires the following time:
Hours per unit
W 0.6
X 0.5
Y 0.6
Z 0.2
The machine is expected to be available for a maximum of 6,000 hours. No other shortages of any other production factor are expected.
Student tasks:

Complete the necessary calculations in order to determine which products the business should plan to make next year. You will need to state your suggestions and support them with the calculations and assumptions presented.
Propose and explain other ways that could help to solve the problem of the shortage of special machine time.

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Robert · Accepted Answer

Solution: 
Resources are limiting to the organization and demand is unlimited. Thus the resources should be used 
in such a manner so as to maximize the firms operating profit. The decision should be based on 
contribution per limiting factor i.e. the amount of contribution generated by each unit of limiting 
resources. (Ray Proctor, 2012, Management Accounting – Decision making & Performance 
Improvement, Volume 4) 
Contribution is considered for decision making purpose as the fixed cost has to be incurred even if the 
company does not produce even a single unit. Thus it does not affect the decision taken by the firm. 
Different product required different resources for example Product X requires 0.5 hours per unit and 
Product Y requires 0.6 hours. Thus in order to compare generally we compute contribution per machine 
hour.  
In the given problem machine hour is limiting factor and we will take the decision on the basis of 
available of machine hour i.e, 6000. Total machine hour required based on the expected number of 
units to be sold is 9550 thus there is a shortage of 3550. This is shown with the help of the following 
calculation –
Products 
 Particulars w x Y Z 
 Number of Units demanded 6500 5500 3700 3400 
 Hours required per Unit 0.6 0.5 0.6 0.2 
 Total Hours required 3900 2750 2220 680 9550 
Total Hours available
6000 
Shortage of units
3550
Thus the above calculation shows that all the four products cannot be produced totally.

For this assignment you will need to read the information provided below, perform calculations, and provided an evaluation and analysis of the case. Smithton, Inc. produces four types of computer...

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