Limiting factor analysis and a discussion of cost-plus pricing AB p.l.c. makes two products, Alpha and Beta. The company made a 500 000 profit last year and proposes an identical plan for the coming year. The relevant data for last year are summarized in Table 1.

Fixed costs were 480 000 for the year, absorbed on machining hours which were fully utilized for the production achieved. A new Managing Director has been appointed and he is somewhat sceptical about the plan being proposed. Furthermore, he thinks that additional machining capacity should be installed to remove any production bottlenecks and wonders whether a more flexible pricing policy should be adopted.

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Table 1: Actuals for last year Product Product Alpha Beta Actual production 20 000 40 000 and sales (units) Total costs per unit 20 40 Selling prices per 25 50 unit (25% on cost) Machining time per 2 1 unit (hours) Potential demand at 30 000 50 000 above selling prices (units)