Essays24.com - Term Papers and Free Essays
Search

Engineering Cost Analysis

Essay by   •  December 9, 2015  •  Exam  •  2,235 Words (9 Pages)  •  1,185 Views

Essay Preview: Engineering Cost Analysis

Report this essay
Page 1 of 9

Q1:  (Maximising returns to a limiting factor).

A company manufactures 2 injection-moulded models of a product, ‘Small’ and ‘Large’.  The Small model has total variable costs of €16, and the Large model has total variable costs of €20.  The company prices its products by ‘marking-up’ its variable costs by 50%.

                                                                                                                                                                                                           The company’s net injecting-moulding capacity is limited to 420 hrs / month., and this capacity can be used for producing either product.  The ‘Small’ can be moulded at the rate of 70 / hr, while the ‘Large’ is moulded at the rate of 30 / hr.  The maximum number of products which can be sold each month is 21k Small models, and 10k Large models.

What combination of the 2 products should the company focus on selling / month in order to maximise its profits?

……………………………………………………………………………………

Q1 Solution:  The limiting factor is the machine-hours:

Small

Large

Variable Cost / unit

€16.00

€20.00

Sale Price / unit

€24.00

€30.00

Contribution / unit

€8.00

€10.00

Units produced per hour

70

30

Contribution per ‘Machine Hour’

€560.00

€300.00

  • Concentrate on selling / producing the Small model because it produces a higher contribution per machine-hour, which is the limiting factor.
  • Maximum demand for Standard = 21k units, which require 21k / 70 m/c hours =  300 hours; - leaving balance of 420 – 300 = 120 hours capacity for the Large unit.
  • Sell the 120 hrs remaining capacity of 120*30 = 3,600 Large units.

Cont’d/ …

Solution 1 continued:

Commercial considerations:

  • Can machine output rate be improved?  -  or include more cavities in the mould for the Large model?

  • What might be the effect on sales of the Small product if supply of the Large model is restricted to 3,600 units / month?
  • Can the contribution of the Large model be improved?                                         (Increase the price and / or lower the VC).

Q2:  (Product profitability).

A company is reviewing its product profitability performance for the last year. While they manufacture only one product, it is supplied in 3 models, viz: ‘Utility’, ‘Standard’, and ‘Deluxe’.  The Accountant has compiled the following cost information for the year:

Product Model

Utility

Standard

Deluxe

Annual Sales in units

10,000

6,000

4,000

Price per unit (€)

150

200

300

Direct Materials (€)

80

100

195

Direct Labour (€)

16

20

40

Fixed Overheads absorbed (€)

40

50

100

Total cost (€)

136

170

335

Net Profit / (Loss) per unit (€)

14

30

(35)

 

Analyse these figures with particular reference to the loss-making Deluxe product.

Q2 Solution:

  1. Compile a summary Profit Statement for the year.

Sales Revenue

10,000 Utility

@ 150

1,500,000

6,000 Standard

@ 200

1,200,000

4,000 Deluxe

@ 300

1,200,000

Total Sales Revenue

3,900,000

Direct Variable Costs

10,000 Utility (80 + 16)

   @   96  

960,000

6,000 Standard(100+20)

   @ 120

720,000

4,000 Deluxe (195+40)

   @ 235

940,000

Total variable Costs

2,620,000

Contribution

1,280,000

Fixed Costs Absorbed

10,000 Utility

@  40

400,000

6,000 Standard

@  50

300,000

4,000 Deluxe

@ 100

400,000

Total Fixed Overheads

1,100,000

Profit

   180,000

...

...

Download as:   txt (15.1 Kb)   pdf (365 Kb)   docx (353.2 Kb)  
Continue for 8 more pages »
Only available on Essays24.com
Citation Generator

(2015, 12). Engineering Cost Analysis. Essays24.com. Retrieved 12, 2015, from https://www.essays24.com/essay/Engineering-Cost-Analysis/65281.html

"Engineering Cost Analysis" Essays24.com. 12 2015. 2015. 12 2015 <https://www.essays24.com/essay/Engineering-Cost-Analysis/65281.html>.

"Engineering Cost Analysis." Essays24.com. Essays24.com, 12 2015. Web. 12 2015. <https://www.essays24.com/essay/Engineering-Cost-Analysis/65281.html>.

"Engineering Cost Analysis." Essays24.com. 12, 2015. Accessed 12, 2015. https://www.essays24.com/essay/Engineering-Cost-Analysis/65281.html.