Example 3: Motor Components Ltd. have secured an order for 3000 components per week from a car manufacturer but there is a shortage of available skilled labour capacity which is restraining the Company from producing the entire quantity within the company. Production, Cost and Sales information of Motor Components Ltd. are as under:- Sales Price of complete component Skilled Labour Capacity per week Production labour rate per hour Variable Production overhead Fixed overhead cost Testing Cost for complete component 1500 7500 hours 120 50% of Labour Cost 500000 per week 20 Each component is finally assembled from three sections, made up of one or more parts as under: Section II 4 5 Part Per section Material cost per part Production labour minutes per part Subcontract price for component of 1400 made up as indicated III 1 20 30 Mins. 60 18 40 15 700 500 200 The two production strategies available are: To produce as many completed components as possible within the existing weekly skilled labour capacity and sub contracts the remaining complete components, and + Produce as many of the three sections of the components as possible and sub contract the remaining sections. You are advice which of the above two production strategies would be more profitable for the company. Example 3: Motor Components Ltd. have secured an order for 3000 components per week from a car manufacturer but there is a shortage of available skilled labour capacity which is restraining the Company from producing the entire quantity within the company. Production, Cost and Sales information of Motor Components Ltd. are as under:- Sales Price of complete component Skilled Labour Capacity per week Production labour rate per hour Variable Production overhead Fixed overhead cost Testing Cost for complete component 1500 7500 hours 120 50% of Labour Cost 500000 per week 20 Each component is finally assembled from three sections, made up of one or more parts as under: Section II 4 5 Part Per section Material cost per part Production labour minutes per part Subcontract price for component of 1400 made up as indicated III 1 20 30 Mins. 60 18 40 15 700 500 200 The two production strategies available are: To produce as many completed components as possible within the existing weekly skilled labour capacity and sub contracts the remaining complete components, and + Produce as many of the three sections of the components as possible and sub contract the remaining sections. You are advice which of the above two production strategies would be more profitable for the company
