1. Extra TA revision (same as Sem 3):
Classic Conservatories Plc (Classic) makes two types of glass sun conservatories at
its manufacturing plant: The President (a large model for the hotel trade) and The
Senator (a smaller model for domestic customers). All conservatories are produced
using the same materials, machinery and a skilled labour force. Production takes
place for five days per week, from 8 am until 8 pm (12 hours), 48 weeks of the year.
All conservatories are made using machine time on each of three machines,
Machines X, Y and Z.
Because of the falling demand for conservatories due to global warming, Classic has
guaranteed not to increase the price of either of its products for the next three years.
In order to maintain a presence in the volatile domestic market, it has also decided to
guarantee to manufacture a minimum of 400 Senators each year to domestic
customers for this three-year period.
Due to poor productivity levels, late orders and declining profits over recent years,
the finance director has suggested the introduction of throughput accounting within
the organisation, together with a ‘Just in Time’ system of production.
Material costs and selling prices for each type of conservatory are shown below.
President Senator
£ £
Selling price per unit 20,300 10,600
Material costs per unit 7,000 4,000
Total factory costs, which include the cost of labour and all factory overheads, are
£14 million each year at the plant.
Out of the 12 hours available for production each day, workers take a one hour lunch
break. For the remaining 11 hours, Machine X is utilised 80% of the time and
Machines Y and Z are utilised 95% of the time.
The following information is available for Machine Y, which has been identified as the
bottleneck resource:
President Senator
Hours per unit Hours per unit
Machine Y 2.1 1.3
There is currently plenty of spare capacity on Machines X and Z. Maximum annual
demand for the President and the Senator is 1,500 units and 900 units respectively.
Required:
1.Calculate the throughput accounting ratio for the President and the Senator.
2.Using throughput accounting, prepare calculations to determine the optimum
production mix and maximum profit of Classic Plc for the next year.
→ ANSWER:
, Cost per factory hour
= total factory costs/ total available hours on bottleneck resource
= total factory costs/ (remaining working hours* days per week* weeks per year* %utilised
machine Y)
Throughput return A B
Selling price per unit Provided
Material costs per unit Provided
Throughput per unit = selling price – materials
Hours per unit required on Machine Y provided (table 2 on bottleneck resource)
Throughput return per hour = throughput per unit/ hours per unit required
Throughput accounting ratio = throughput return per hour/ cost per factory
hour cal. above
Comment: In any organisation, one would expect the throughput accounting ratio to
be greater than 1. This means that the rate at which the organisation is generating
cash from sales of this product is greater than the rate at which it is incurring costs. It
follows on, then, that if the ratio is less than 1, changes need to be made quickly.
Whilst the ratio for A is more than 1, it is just under 1 for B.
Optimum production plan
Product No. of units Hours per Total hours Throughput Total T/P
unit return per
hour
B Minimum Provided = no.units* Cal. above =Throughput
guarantee (table 2) hours per return per
provided unit hour * total
hours
A = X/ hours Provided = total Cal. above =Throughput
per unit (table 2) available return per
hours – total hour * total
hours of B hours
=X
TOTAL Total = total T/P of
available B + total T/P
hours on of A
bottle
necksource
cal. above
Less total provided
factory costs
Profit TOTAL –
total factory
costs
Classic Conservatories Plc (Classic) makes two types of glass sun conservatories at
its manufacturing plant: The President (a large model for the hotel trade) and The
Senator (a smaller model for domestic customers). All conservatories are produced
using the same materials, machinery and a skilled labour force. Production takes
place for five days per week, from 8 am until 8 pm (12 hours), 48 weeks of the year.
All conservatories are made using machine time on each of three machines,
Machines X, Y and Z.
Because of the falling demand for conservatories due to global warming, Classic has
guaranteed not to increase the price of either of its products for the next three years.
In order to maintain a presence in the volatile domestic market, it has also decided to
guarantee to manufacture a minimum of 400 Senators each year to domestic
customers for this three-year period.
Due to poor productivity levels, late orders and declining profits over recent years,
the finance director has suggested the introduction of throughput accounting within
the organisation, together with a ‘Just in Time’ system of production.
Material costs and selling prices for each type of conservatory are shown below.
President Senator
£ £
Selling price per unit 20,300 10,600
Material costs per unit 7,000 4,000
Total factory costs, which include the cost of labour and all factory overheads, are
£14 million each year at the plant.
Out of the 12 hours available for production each day, workers take a one hour lunch
break. For the remaining 11 hours, Machine X is utilised 80% of the time and
Machines Y and Z are utilised 95% of the time.
The following information is available for Machine Y, which has been identified as the
bottleneck resource:
President Senator
Hours per unit Hours per unit
Machine Y 2.1 1.3
There is currently plenty of spare capacity on Machines X and Z. Maximum annual
demand for the President and the Senator is 1,500 units and 900 units respectively.
Required:
1.Calculate the throughput accounting ratio for the President and the Senator.
2.Using throughput accounting, prepare calculations to determine the optimum
production mix and maximum profit of Classic Plc for the next year.
→ ANSWER:
, Cost per factory hour
= total factory costs/ total available hours on bottleneck resource
= total factory costs/ (remaining working hours* days per week* weeks per year* %utilised
machine Y)
Throughput return A B
Selling price per unit Provided
Material costs per unit Provided
Throughput per unit = selling price – materials
Hours per unit required on Machine Y provided (table 2 on bottleneck resource)
Throughput return per hour = throughput per unit/ hours per unit required
Throughput accounting ratio = throughput return per hour/ cost per factory
hour cal. above
Comment: In any organisation, one would expect the throughput accounting ratio to
be greater than 1. This means that the rate at which the organisation is generating
cash from sales of this product is greater than the rate at which it is incurring costs. It
follows on, then, that if the ratio is less than 1, changes need to be made quickly.
Whilst the ratio for A is more than 1, it is just under 1 for B.
Optimum production plan
Product No. of units Hours per Total hours Throughput Total T/P
unit return per
hour
B Minimum Provided = no.units* Cal. above =Throughput
guarantee (table 2) hours per return per
provided unit hour * total
hours
A = X/ hours Provided = total Cal. above =Throughput
per unit (table 2) available return per
hours – total hour * total
hours of B hours
=X
TOTAL Total = total T/P of
available B + total T/P
hours on of A
bottle
necksource
cal. above
Less total provided
factory costs
Profit TOTAL –
total factory
costs
