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Profit Maximization Essay

Details Pixie

(£ per unit)

Elf

(£ per unit)

Queen

(£ per unit)

King

(£ per unit)

Selling Price 111 98 122 326
Variable Costs:        
Direct Materials 25 35 22 25
Direct Labor 5 5 5 5
Variable Overheads 17 18 15 16
  47 58 42 46
Contribution 64 40 80 280
Type 1 Labor 8 6
Type 2 Labor 10 10
Type 3 Labor 5 25
Contribution per type 1 labor 8 6.67
Contribution per type 2 labor 8 28
Contribution per type 3 labor 16 11.2

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Details Ranking
  Type 1 Type 2 Type 3
Pixie 1 N/A N/A
Elf 2 N/A N/A
Queens N/A 2 1
King N/A 1 2

Planned Production Schedule

Elf = no production (no hours of type 1 labor available)

King = 1,000 units (full production)

Queen = no production (no hours of type 3 labor available)

Profit Statement Pixie

(£ per unit)

King

(£ per unit)

Total

(£ per unit)

Sales 111,000 326,000 437,000
Variable Costs:      
Direct Materials 25,000 25,000 50,000
Direct Labor 40,000 175,000 215,000
Variable Overhead 17,000 16,000 33,000
Total Variable Costs 82,000 216,000 298,000
Contribution 29,000 110,000 139,000
Fixed Costs     15,000
Net Profit     124,000

Direct Labor King:

Type 2 = 1,000 units x 10 hours per unit x £5 =       £50,000

Type 3 = 1,000 units x 25 hours per unit x £5 =       £125,000

Total Direct Labor Cost                                            £175,000

  1. b) Under instances of limiting factors, like labor in this case, profit maximization is determined by deducing the production that will provide the highest contribution per limiting factor (Drury C. 1996, p 265). This is based on the premise that optimum utilization of resources will stem from producing the products that provide the highest profit in terms of the limited resource used. The main limitation of the aforementioned approach is that it solely considers financial factors.  In a business environment, there are qualitative features, which also significantly affect the organization.  For instance, products Elf and Queen might be loss leaders.  These are products, they generate low profits and sometimes-even losses, but are key variables in boosting the sales of other products (Kotler P. et al 2004, p 378).  For example, blank CDs and DVDs generated few profits to retailers of computer equipment.  However, they attract clients, who may eventually purchase hardware products that generated greater income.

References:

 

Drury C. (1996). Management and Cost Accounting. Fourth Edition.  New York: International Thomson Business Press.

Kotler P.; Armstrong A. (2004). Principles of Marketing. Tenth Edition. New Jersey: Pearson Education Incorporation.

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