DECISION MAKING:UTILIZATION OF SCARCE RESOURCES

AND SHUT DOWN OR CONTINUE OPERATIONS

Utilization of scarce resources

1. ABC produces three products: X, Y, and Z. But only one machine is used to produce the products with 2400
minutes available during the week. Additional information are as follows:
Product Demand CM Machine time(in
minutes)
X 120 P20 5
Y 80 36 10
Z 100 50 15

How many units of each product should be produced and sold to maximize the weekly contribution?

2. If plant capacity for cutting time and shaping time is 80 hours and 100 hours, respectively, and it takes four hours to
cut and two hours to shape a standard model and two hours to cut and five hours to shape a deluxe model, the
maximum number of standard and deluxe models that can be produced are?

3. The following information pertains to the four products of Water Company. Surprisingly they have developed
a machine that can produce foods using only water. Direct materials and direct labor are readily available. The
company can acquire as much water as it requires since floods are frequent in their place. However, the
company is limited to a maximum of 1,200 machine hours per month:
Ginataangtubig Pritongtubig Baked tubig Lechongtubig
Selling price per unit P75 P90 P100 P125
Variable cost per unit 35 55 50 80
Machine hours per unit 8 5 25 3

Assuming that there is no market limit for any products, the company should produce and sell what
product/s?

Assuming that the maximum demand for each product are as follows
Ginataangtubig: 500units
Pritongtubig: 300units
Baked tubig: no limit
Lechongtubig: 250units
What is the best product combination?

4. Bush Manufacturing has 31,000 labor hours available for producing M and N. Consider the following information:

Product M Product N

Required Labor time per unit (hours) 2 3

Maximum demand(units) 6,500 8,000

Contribution margin per unit P5 5.7

Contribution margin per labor hour P2.5 P1.9

If Bush follows proper managerial accounting practices in terms of setting a production schedule, how much
contribution margin would the company expect to generate?

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5. Holtz Company makes three products in a single facility. Data concerning these products flows:
A B C
Selling price per unit P75.9 P71.1 P73.4
Direct materials 29.7 30.2 33.4
Direct Labor 21.2 19.8 19.6
Variable manufacturing overhead 4.9 5.6 7.6
Variable selling cost per unit 1.3 3.9 1.8
Mixing minutes per unit 2.1 1.7 1.3
Monthly demand in units 4,000 1,000 2,000
The mixing machines are potentially the constraint in the production facility. A total of 12,500 minutes are
available per month on these machines. Direct Labor is a variable cost in this company.
Required:
A. How many minutes of mixing machine time would be required to satisfy demand for all three
products?
B. How much of each product should be produced to maximize net operating income? (roundoff to the
nearest whole unit)
C. Which product makes the Least profitable and most profitable use of the grinding machines?

Shut down or continue operations

6. Mystic, Inc., produces a variety of products that carry the logos of teams in Southern Football League (SFL). The
company recently paid the league P85,000 for the rights to market a popular player jersey and immediately began
production. The following information is available:

Number of jerseys manufactured: 25,000

Cost of jerseys manufactured: P625,000

Amount of manufacturing costs paid to-date: P410,000

Number of jerseys sold to-date: 0

Estimated future marketing costs: P330,000

Anticipated selling price per jersey: P42

The SFL is about to file a lawsuit to stop jersey sales and is demanding another P50,000 from Mystic for the
manufacturing rights. Conversations with Mystic's attorneys indicate that the league has a strong case and
is likely to win the suit. If this situation arises, Mystic will be unable to recover any amounts paid to the SFL

Required:

Mystic's sales department anticipates very strong demand and a sellout of all jerseys manufactured.

A. Determine the overall profitability of the jersey product line if Mystic settles the disagreement with
the SFL and the anticipated sellout occurs.
B. Should the company pay the additional P50,000 demanded by the league or should the jersey program
be dropped? Show computations to support your answer.

7. Boa mining Company currently is operating at less than 50% of practical capacity. The management of the company
expects sales to drop below the present level of 10,000 tons of ore per month very soon. The sales price per ton is
P3 and the variable cost per ton is P2. Fixed costs per month total P10, 000. Management is concerned that a
further drop in sales volume will generate loss and accordingly is considering temporarily suspending operations
until demand in the metals markets rebounds and prices once suspension of operations appears to be the only
viable alternative. Management estimates that suspension of operations would reduce fixed costs from P10,000 to
P4,000 per month.
Required:
a. At what sales volume per month will the company be indifferent between continuing to operate
the mine and closing it?

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