Question
A company manufactures two products A and B. The budget statement below was produced using a traditional absorption costing approach. It shows the profit per
A company manufactures two products A and B. The budget statement below was produced using a traditional absorption costing approach. It shows the profit per unit for each product based on the estimated sales demand for the period.
Product A ($) Product B ($)
Selling price per unit 46 62
Production costs per unit:
Material costs 18 16
Labour costs 4 10
Overhead costs 8 12
Profit per unit 16 24
Additional information:
Estimated sales demand (units) 6000 8000
Machine hours per unit 0.5 0.8
It has now become apparent that the machine which is used to produce both products has a maximum capacity of 8000 hours and the estimated sales demand cannot be met in full. Total production costs for the period, excluding direct material cost, are $248 000. No inventories are held of either product.
Required:
(i) Calculate the return per machine hour for each product if a throughput accounting approach is used.
(ii) Calculate the profit for the period, using a throughput accounting approach, assuming the company prioritizes Product B.
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