Question 4

(a)

Explain in detail different types of pricing strategies that can be adopted by companies to maximise their profitability

(b)

R Ltd makes three products, soya milco and yoghurt. All the three products must be offered for sales each month in order to provide a complete market service. The products must be offered for sales each month in order to provide a complete market service. The products are fragile and their quality deteriorates rapidly shortly after production.

The products are produced on two types of machine and worked on a single grade of direct labour, Fifty direct employees are paid 8.00 per hour for a guaranteed minimum of 160 hours per month.

All the products are first pasteurised on a pasteurised on a machine type A and then finished and sealed on a machine type B.

The machine hour requirement for each of eh products are as follows:

Soya

Hours per unit

Machine Type A 1.5

Machine Type B 1.0

Milco

Hours per unit

Machine type A 4.5

Machine type B 2.5

Yoghurt

hours per unit

Machine type A 3.0

Machine type B 2.0

The capacity of the available machines types A and B are 6,000 hours and 5,000 hours per month respectively, Details of eh selling prices , unit costs monthly demand for the three products are as follows:

SOYA per unit

Selling price 910

Concentrate cost 220

Other direct material cost 230

Direct labour cost @ 8.00

per hour 60

Over heads 240

PROFIT 160

Maximum monthly

demand (units) 1200

MILCO per unit

Selling price 1,740

Concentrate cost 190

Other direct material cost 110

Direct labour cost @ 8.00

per hour 480

Overheads 620

Profit 340

Maximum monthly demand (units) 700

YOGHURT per unit

Selling price 1,400

Concentrate cost 160

Other direct material cost 140

Direct labour cost @ 8,00

per hour 360

Over heads 520

PROFIT 220

Maximum monthly demand (units) 600

Although, R ltd uses marginal costing and contribution analysis as the basis for its decision making activities, profits are reported in the monthly management accounts using the absorption costing basis. Finished goods inventories are valued in the monthly management accounts at full absorption cost,

REQUIRED

(a)

Calculate the monthly machine utilisation rate for each product and explain which machines is the bottleneck/ limiting factor

(b)

use current system of marginal costing and contribution analysis to calculate the profit maximising monthly output of the three products.

(c)

Explain why throughput accounting might provide more relevant information in R ltd circumstances.

(d)

Use a throughput approach to calculate the throughput - maximising monthly output of the three products

(e)

Explain the throughput accounting approach to optimising the level of inventory and its valuation, Contrast this approach to the current system employed by R ltd,