RT produces two products from different quantities of the same resources using a just-in-time (JIT) production system. The selling price and resource requirements of each of the products are shown below:

Market research shows that the maximum demand for products R and T during June 2010 is 500 units and
800 units respectively. This does not include an order that RT has agreed with a commercial customer for the supply of 250 units of R and 350 units of T at selling prices of $100 and $135 per unit respectively. Although the customer will accept part of the order, failure by RT to deliver the order in full by the end of June will cause RT to incur a $10,000 financial penalty. At a recent meeting of the purchasing and production managers to discuss the production plans of RT for June, the following resource restrictions for June were identified:
Direct labour hours 7,500 hours
Material A 8,500 kgs
Material B 3,000 litres
Machine hours 7,500 hours
(Refer to previous 2 questions.)
You have now presented your optimum production plan to the purchasing and production managers of RT.
During your presentation it became clear that the predicted resource restrictions were rather optimistic. In fact, the managers agreed that the availability of all of the resources could be as much as 10% lower than their original predictions.
Assuming that RT completes the order with the commercial customer, and using linear programming, show the optimum production plan for RT for June 2010 on the basis that the availability of all resources is 10% lower than originally predicted.

• A. The optimal plan is to produce 500 units of Product R and 550 units of product T in addition to the contract.
• B. The optimal plan is to produce 450 units of Product R and 690 units of product T in addition to the contract.
• C. The optimal plan is to produce 510 units of Product R and 720 units of product T in addition to the contract.
• D. The optimal plan is to produce 560 units of Product R and 670 units of product T in addition to the contract.
• E. The optimal plan is to produce 520 units of Product R and 620 units of product T in addition to the contract.
• F. The optimal plan is to produce 550 units of Product R and 650 units of product T in addition to the contract.

RFT, an engineering company, has been asked to provide a quotation for a contract to build a new engine.
The potential customer is not a current customer of RFT, but the directors of RFT are keen to try and win the contract as they believe that this may lead to more contracts in the future. As a result, they intend pricing the contract using relevant costs. The following information has been obtained from a two-hour meeting that the Production Director of RFT had with the potential customer. The Production Director is paid an annual salary equivalent to $1,200 per 8-hour day. 110 square meters of material A will be required. This is a material that is regularly used by RFT and there are 200 square meters currently in inventory. These were bought at a cost of
$12 per square meter. They have a resale value of $10.50 per square meter and their current replacement cost is $12.50 per square meter. 30 liters of material B will be required. This material will have to be purchased for the contract because it is not otherwise used by RFT. The minimum order quantity from the supplier is 40 liters at a cost of $9 per liter. RFT does not expect to have any use for any of this material that remains after this contract is completed. 60 components will be required. These will be purchased from HY. The purchase price is $50 per component. A total of 235 direct labour hours will be required. The current wage rate for the appropriate grade of direct labour is $11 per hour. Currently RFT has 75 direct labour hours of spare capacity at this grade that is being paid under a guaranteed wage agreement. The additional hours would need to be obtained by either (i) overtime at a total cost of $14 per hour; or (ii) recruiting temporary staff at a cost of $12 per hour. However, if temporary staff are used they will not be as experienced as RFT's existing workers and will require 10 hours supervision by an existing supervisor who would be paid overtime at a cost of $18 per hour for this work. 25 machine hours will be required. The machine to be used is already leased for a weekly leasing cost of $600. It has a capacity of 40 hours per week. The machine has sufficient available capacity for the contract to be completed. The variable running cost of the machine is $7 per hour. The company absorbs its fixed overhead costs using an absorption rate of $20 per direct labour hour.
Select ALL the true statements.

• A. Material B was a relevant cost.
• B. The machine is currently being leased and it has spare capacity so it will either stand idle or be used on this work. The lease cost will be a relevant cost or $10 per hour.
• C. The relevant cost is $7100
• D. The cost for the production director meeting was a relevant cost.
• E. The relevant cost is $7010
• F. The company absorbs its fixed overhead costs using an absorption rate of $20 per direct labour hour. This is a relevant cost.
• G. The relevant cost is $7080
• H. Material A was a relevant cost.
• I. The components are to be purchased from HY at a cost of $50 each. This is a relevant cost because it is future expenditure that will be incurred as a result of the work being undertaken.

JRL manufactures two products from different combinations of the same resources. Unit selling prices and unit cost details for each product are as follows:

The optimal solution in the previous question shows that the shadow prices of skilled labour and direct material A are as follows:
Skilled labour $ Nil
Direct material A $11.70
Explain the relevance of these values to the management of JRL.
What is the additional contribution that can be earned?

• A. Thus the additional contribution that can be earned and therefore the penalty value at which WRX would decide not to supply the major customer order in full is $5, 825
• B. Thus the additional contribution that can be earned and therefore the penalty value at which WRX would decide not to supply the major customer order in full is $4, 570
• C. Thus the additional contribution that can be earned and therefore the penalty value at which WRX would decide not to supply the major customer order in full is $4, 825
• D. Thus the additional contribution that can be earned and therefore the penalty value at which WRX would decide not to supply the major customer order in full is $3, 825

A company's management is considering investing in a project with an expected life of 4 years. It has a positive net present value of $180,000 when cash flows are discounted at 8% per annum. The project's cash flows include a cash outflow of $100,000 for each of the four years. No tax is payable on projects of this type.
The percentage increase in the annual cash outflow that would cause the company's management to reject the project from a financial perspective is, to the nearest 0.1%:

• A. 45.0%
• B. 184.0%
• C. 55,6%
• D. 54.3%

A company produces three products D, E and F. The statement below shows the selling price and product costs per unit for each product, based on a traditional absorption costing system.

Each of the products is produced using Process A which has a maximum capacity of 2,500 hours per period.
If a traditional contribution approach is used, the ranking of products, in order of priority, for the profit maximizing product mix will be:

• A. E, D, F
• B. D, E, F
• C. D, E, F
• D. F, D, F