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Profit Maximization with Resource Limits

The document discusses profit maximization in the context of limiting factors, which are constraints on resources that hinder a business's sales potential. It provides examples of how to analyze and allocate resources effectively when faced with limitations in materials or labor, along with practice questions for calculating production plans and identifying limiting factors. The document emphasizes the importance of maximizing total profit by focusing on the contribution earned from each unit of the limiting factors.

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Ama Binu
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52 views2 pages

Profit Maximization with Resource Limits

The document discusses profit maximization in the context of limiting factors, which are constraints on resources that hinder a business's sales potential. It provides examples of how to analyze and allocate resources effectively when faced with limitations in materials or labor, along with practice questions for calculating production plans and identifying limiting factors. The document emphasizes the importance of maximizing total profit by focusing on the contribution earned from each unit of the limiting factors.

Uploaded by

Ama Binu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Profit Maximization with Limiting Factors

Limiting factors refer to the constraints in availability of resources that prevent a business from
maximizing its sales. For example, shortages in labor, material supply or machine hours limit
the achievement of the full sales potential a business. When a business has a limiting factor, a
decision needs to be taken as to how the available resources can be best utilized.

The assumptions in limiting factor analysis are that a resource constraint is a short-term
problem and that a business seeks to maximize total profit with the available resources. For
this purpose, you need to first identify the limiting factors and allocate resources considering
the amount of contribution earned for one unit of the limiting factors.

Practice Question 1
A company manufactures three products – A, B and C, for which the estimated sales and cost
of manufacturing for the next month are provided below.

A B C
Selling price (Rs) 170 100 220
Usage per unit;
Direct material (Rs 20/- per kilogram) 2 kilograms 1.5 2
Direct labour (Rs 300/- per hour) 0.2 hours 0.1 0.3
Expected sales quantity 1,000 800 1,100
Variable overhead is charged at the rate of Rs 100/- per labour hour. Monthly fixed selling
and administrative expenses are Rs 250,000, which are absorbed at the rate of Rs 400/- per
labour hour.

Prepare the production plan under each of the following situations;

Situation I – The material supply is limited to 4,500 kilograms in the next month.
Situation II – The labour supply is limited to 400 hours in the next month.

Practice Question 2
Alpha Enterprises produces two distinct products: X and Y. The manufacturing process
comprises two key stages: assembly, which requires machinery, and finishing, which relies on
skilled labor. The table below provides details of the resource requirements for each unit of the
two products, along with their respective variable costs and selling prices.

1
Product Raw material usage Labour Machine Selling Unit variable
(kilograms) hours hours price (Rs) cost (Rs)
X 3 1 2 120 70
Y 5 2 3 105 55

The company has assessed that its resources for the upcoming week’s operations are limited
to 4,400 kilograms of raw materials, 1,200 labor hours and 2,200 machine hours. The
anticipated demand for the next week stands at 400 units of Product X and 550 units of
Product Y.
Based on the above information, you are required to;
(i) Identify the limiting factor(s) in this scenario with appropriate justifications.

(ii) Calculate the contribution per unit of the products X and Y.

(iii) Determine the optimum quantities of each product to be produced if only the
availability of the machine hours is considered as the limiting factor.

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