Limiting Factor Essay Example | Topics and Well Written Essays - 1500 words - 1

Limiting Factor - Essay Example This variable cost rate for each department is allocated in order to cover costs such as machine time, electricity, maintenance, and equipment depreciation (Banker, Datar, Kaplan). As we can see our total production cost for each unit of product X, Y, Z consists of a variable cost rate and total labor from all three production departments. The total production costs for each unit of product X was  £752,  £804 for product Y and  £1084 for product Z. Taking into consideration the total required units of production for each product line for the whole year, the total production costs for Product X was  £11,280,000,  £9,648,000 for Product Y, and  £13,008,000 for Product Z.  £33,936,000.The fixed overhead costs budget for the plant, regardless of output level is  £2,400,000 a year. Total income (total revenue - total variable costs – fixed costs) for the year utilizing the original production budget equals  £1,224,000 (Imanet, 2008). According to our sales manager there is a limitation on producing any additional units of production. Department B does not have any additional production capacity due to lack of skilled labor workers which to hire in order to accommodate any additional manufacturing output. By performing a cost volume profit analysis of our product line we can determine which product mixture will provide maximum profit maximization potential based on the manufacturing limitations with relation to Department B (Horngren, Foster, Datar, 2000). The contribution margin of a product provides the user with the amount in pounds that each individual unit sale contributes towards income after all variable expenses have been deducted. Through a comparison of the contribution margin percentage of all three product types we can plainly see that the most profitable product type is X with 10.48% or  £88 per item sold. Although Product Z provides the highest gross margin amount with  £116, it stands as the se cond most profitable