Intermediate: Key/limiting factors and the allocation of scarce capacity Domestic political trouble in the country of an overseas supplier is causing concern in your company because it is not known when further supplies of raw material'x' will be received. The current stock held of this particular raw material is 17 000 kilograms which cost £136000. Based on raw material'x, your company makes five different products and the expected demand for each of these, for the next three months, is given below together with other relevant Information:

The direct wages rate per hour is £5 and production overhead is based on direct wages cost- the variable overhead absorption rate being 40% and the fixed overhead absorption rate being 60%.
Variable selling costs, including sales commission, are 15% of selling price.
Budgeted fixed selling and administration costs are £300 000 per annum.
Assume that the fixed production overhead incurred will equal the absorbed figure.
You are required to

(a) Show what quantity of the raw material on hand ought to be allocated to which products in order to maximise profits for the forthcoming three months; (13 marks)

(b) present a brief statement showing contribution and profit for the forthcoming three months, if your suggestion in

(a) is adopted; (6 marks)

(c) comment briefly on the analysis you used to aid the decision-making process in

(a) and give three other examples of business problems where this type of analysis can be useful.

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Product Kilograms of Direct labour Selling code raw material 'x' hours per unit price per unit of of finished per Expected demand over three finished product product unit months (kg) 701 702 0.5 821 822 1.3 937 07 35 14 13 15 (hours) () (units) 1.0 26 8000 0.8 28 7200 1.5 34 9000 1.1 38 12000 1.4 40 10000