Engineering Cost Analysis

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?

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

• 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:

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

Q2 Solution:

1. Compile a summary Profit Statement for the year.