QUESTION 1(a)
The general rule of profit maximization is that a firm produces up to the point where marginal revenue equals marginal cost. Marginal revenue can be simply defined as the change in total revenues as a result of an increase of one unit. Similarly Marginal cost on the other hand is the change in total cost as a result of an increase in one unit of production. As such maximize profits, as is the aim of all profit making businesses, is to produce and sell units provided the revenue from additional unit(s) outstrip the cost of producing it or them. By evaluating the contribution margins of Atco Plc’s products A and B, their contribution margins and contribution margin ratios are positive. Contribution margin ratios aid in the determination …show more content…
Every production process has a constraint or a bottleneck, and the best way to improve on the performance and profitability is to maximise throughput per unit of bottleneck resource.
In this case Atco Plc has to find an optimum plan for production. As such contribution per unit is determined for all the products, then contribution per unit of bottleneck resource is determined by determining how much of the bottleneck resource each unit requires. From a throughput accounting perspective the procedure is similar only that it focuses on throughput return per unit of the scarce/bottleneck resource as opposed to contribution per unit of bottleneck resource.
Throughput is calculated as sales minus total variable costs, which in turn implies sales minus direct cost of materials, because in throughput accounting all other costs besides direct material costs are considered to be fixed this is different from contribution which is calculated as sales minus total variable costs including labour. According to (Irons, 2011) to work on the basis of maximising contribution is flawed because to do so is to take into account costs that cannot be controlled in the short …show more content…
The throughput accounting ratios gauge this relationship and depict the relation between throughput and production costs per bottleneck resource.
In the case of Atco Plc product B, the throughput ratio is 1.23. this implies that the returns outstrip the costs, as such it is imperative that Atco employ means and measures to maximise the returns and thus increasing the ration further above 1.
As such, Atco could;
1. Increase the selling price of B above GBP70.00, to further absorb the impact of the rather large direct material cost per unit of GBP40.00, which is 57% of selling price. on the other hand Atco could negotiate for trade discounts from suppliers in an effort to reduce the cost.
2. Efficiency training and coaching of staff could go a long way in reducing the the time required to produce product B as such increasing the throughput
The general rule of profit maximization is that a firm produces up to the point where marginal revenue equals marginal cost. Marginal revenue can be simply defined as the change in total revenues as a result of an increase of one unit. Similarly Marginal cost on the other hand is the change in total cost as a result of an increase in one unit of production. As such maximize profits, as is the aim of all profit making businesses, is to produce and sell units provided the revenue from additional unit(s) outstrip the cost of producing it or them. By evaluating the contribution margins of Atco Plc’s products A and B, their contribution margins and contribution margin ratios are positive. Contribution margin ratios aid in the determination …show more content…
Every production process has a constraint or a bottleneck, and the best way to improve on the performance and profitability is to maximise throughput per unit of bottleneck resource.
In this case Atco Plc has to find an optimum plan for production. As such contribution per unit is determined for all the products, then contribution per unit of bottleneck resource is determined by determining how much of the bottleneck resource each unit requires. From a throughput accounting perspective the procedure is similar only that it focuses on throughput return per unit of the scarce/bottleneck resource as opposed to contribution per unit of bottleneck resource.
Throughput is calculated as sales minus total variable costs, which in turn implies sales minus direct cost of materials, because in throughput accounting all other costs besides direct material costs are considered to be fixed this is different from contribution which is calculated as sales minus total variable costs including labour. According to (Irons, 2011) to work on the basis of maximising contribution is flawed because to do so is to take into account costs that cannot be controlled in the short …show more content…
The throughput accounting ratios gauge this relationship and depict the relation between throughput and production costs per bottleneck resource.
In the case of Atco Plc product B, the throughput ratio is 1.23. this implies that the returns outstrip the costs, as such it is imperative that Atco employ means and measures to maximise the returns and thus increasing the ration further above 1.
As such, Atco could;
1. Increase the selling price of B above GBP70.00, to further absorb the impact of the rather large direct material cost per unit of GBP40.00, which is 57% of selling price. on the other hand Atco could negotiate for trade discounts from suppliers in an effort to reduce the cost.
2. Efficiency training and coaching of staff could go a long way in reducing the the time required to produce product B as such increasing the throughput