### Calculate the optimum production plan

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##### Reference no: EM13486384

Exam Standard Question

More Limited produces four types of electric motors. Type X and Y are sold by the business to external customers. The other two types A and B are a component in some of the business's other products. Costings per unit are as follows;

 Electric Motors X Y A B £ £ £ £ Variable materials 15 20 16 17 Variable labour 25 10 10 15 Other variable 5 3 2 2 Fixed cost 20 8 8 12 ===== ==== ==== ==== Total cost 65 41 36 46 Selling price(per unit) £60 £43

All four products make use of a specialist machine in their manufacture. The time required for each product on the specialist machine and the demand for each product for next year is given below;

 Time on Specialist Machine per unit Demand Product  X 0.5   hours per unit 5,000 units Product  Y 0.4   hours per unit 6,000 units Product  A 0.5   hours per unit 4,000 units Product  B 0.3   hours per unit 3,000 units

The maximum capacity of the specialist machine for next year is limited to 6,000 hours.

For business reasons the organisation wishes to supply at least 30% of the demand for products X and Y. There is an external supplier who is prepared to supply unlimited quantities of products A and B, at a price of £40 and £61 respectively.

Required

1. Calculate the optimum production plan the firm should follow next year given the above constraints.

2. Calculate the maximum amount it would be worth the firm paying per hour, to rent an additional specialist machine.

3. Other than renting a specialist machine, what could More Limited do to solve the problem of shortage of specialist machine time?

4. Critically discuss the use of marginal costing and absorption costing in the decision making process.

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