Question Tag: Profit Maximization

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  • 4 Marks

MA – Nov 2024 – L2 – Q5b – Profit Maximization and Batch Selection

Determination of the optimal number of printer batches to import and sell to maximize profit.

Awuah deals in online business, importing and selling printers. The cost of each set of printers varies depending on the number purchased, although printers can only be purchased in batches of 1,000 units. Awuah also has to pay import taxes which vary according to the quantity purchased. Awuah has already carried out some market research and identified that sales quantities are expected to vary depending on the price charged.

The following data has been established for the first month:

Number of Batches Imported and Sold Average Cost per Unit (Including Import Taxes) (GH¢) Total Fixed Costs per Month (GH¢) Expected Selling Price per Unit (GH¢)
1 10.00 10,000 20
2 8.80 10,000 18
3 7.80 12,000 16
4 6.40 12,000 13

Required:

Determine the number of batches of printers Awuah should import and sell to maximize profit.

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  • 16 Marks

MA – Nov 2024 – L2 – Q5a – Limiting Factor Decision and Profit Maximization

Determination of the optimum production plan considering scarce resources.

Manche 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:

Product C L
Unit Selling Price (GH¢) 130 160
Resources per Unit:
Direct Labour (GH¢8 per hour) 3 hours 5 hours
Material A (GH¢3 per kg) 5 kg 4 kg
Material B (GH¢7 per litre) 2 litres 1 litre
Machine Hours (GH¢10 per hour) 3 hours 4 hours
Fixed Overhead (GH¢8 per hour) 1 hour 1 hour

Market research shows that the maximum demand for products C and L during August 2024 is 500 units and 800 units respectively. This does not include an order that Manche has agreed with a commercial customer for the supply of 250 units of C and 350 units of L at selling prices of GH¢100 and GH¢135 per unit, respectively. Failure by Manche to deliver the order in full by the end of August will cause Manche to incur a GH¢5,000 financial penalty.

At a recent meeting between the Purchasing Manager and Production Manager to discuss the production plans of C and L for August, the following resource restrictions for the year were identified:

  • Direct Labour Hours: 90,000 hours
  • Machine Hours: 90,000 hours

The resource restrictions were evenly distributed throughout the year.

Required:

i) Prepare the optimum production plan for August 2024 using relevant computations. 
ii) Determine the contribution from adopting this plan. 
iii) Using relevant computations, show whether Manche should complete the order from the commercial customer assuming any excess labour hours for not making the contract can be used to produce 300 units of product ‘F’ with a contribution of GH¢55 per unit.

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  • 1 Marks

BMF – Nov 2020 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Identify the term for strategies maximizing profits through innovative financial methods.

Strategies adopted by companies to maximize profits using innovative methods to compute the fair value of financial instruments is best described as:
A. Financial accounting
B. Financial engineering
C. Strategic financial management
D. Strategic management accounting
E. Strategic financial accounting

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  • 15 Marks

PM – May 2024 – L2 – SC – Q7 – Cost-Volume-Profit (CVP) Analysis

Analysis of production constraints to determine optimal production levels and profit maximization using contribution analysis.

Jumbo Tailors Nigeria Limited manufactures three unique wears for which the maximum revenue for the coming year is estimated as follows:

Product Estimated Revenue (₦)
Trousers 8,250,000
Jackets 9,880,000
Skirts 12,390,000

Summarized unit cost data are as follows:

Product Direct Material (₦) Direct Labour (₦) Variable Costs (₦) Fixed Costs (₦)
Trousers 1,000 500 800 250
Jackets 900 450 1,600 500
Skirts 700 350 1,000 400

The allocation of fixed costs was derived from last year’s production level and may be reviewed if current output plans differ.

Estimated Selling Prices:

  • Trousers: ₦3,300
  • Jackets: ₦3,800
  • Skirts: ₦2,950

The products are processed on sewing machines housed in three blocks. Block A contains type I machines, with an estimated maximum machine hour capacity of 39,200 hours and a fixed overhead cost of ₦1,960,000 per annum. Block B contains type II machines, with 20,000 machine hours available and a fixed overhead cost of ₦1,500,000 per annum. Block C also contains type II machines, with 16,000 machine hours available and a fixed overhead cost of ₦740,000 per annum.

The required machine hours per unit of output for each product on each machine type are as follows:

Product Type I Machine (hours) Type II Machine (hours)
Trousers 2 3
Jackets 4 6
Skirts 6 2

Required:
a. Determine the optimal production plan which Jumbo Tailors Nigeria Limited should adopt. (12 Marks)
b. Calculate the total profit that would be made if the production plan in (a) above is adopted. (3 Marks)

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  • 30 Marks

PM – May 2024 – L2 – SA – Q1 – Costing Systems and Techniques

Calculation of machine utilization rates, identification of bottlenecks, and application of throughput accounting.

Tani Kamac (TK) makes three products A, B, and C. All three products must be offered for sale each month to provide a complete market service. The products are fragile, and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machines and worked on by a single grade of direct labor. Five direct employees are paid ₦80 per hour for a guaranteed minimum of 160 hours each per month. All products are first molded on machine type 1 and then finished and sealed on machine type 2. The machine hours required for each product are as follows:

Product A (hrs/unit) Product B (hrs/unit) Product C (hrs/unit)
Machine 1 1.5 4.5 3.0
Machine 2 1.0 2.5 2.0

The capacity of machine type 1 is 600 hours per month, and machine type 2 is 500 hours per month.

Additional details:

Product A Product B Product C
Selling Price (₦) 910 1,740 1,400
Component Cost (₦) 220 190 160
Other Direct Material Cost (₦) 230 110 140
Direct Labor Cost at ₦80/hr 60 480 360
Overheads (₦) 240 620 520
Profit (₦) 160 340 220
Maximum Monthly Demand (units) 120 70 60

TK uses marginal costing and contribution analysis for decision-making, while profits are reported using absorption costing.

Required:
a. Calculate the machine utilization rate per month for each machine and explain which of the machines is the bottleneck/limiting factor. (4 Marks)
b. Using the current system of marginal and contribution analysis, calculate the profit-maximizing monthly output of the three products. (4 Marks)
c. Explain why throughput accounting might provide more relevant information in TK’s circumstances. (6 Marks)
d. Using a throughput approach, calculate the throughput-maximizing monthly output of the three products. (5 Marks)
e. Explain the throughput accounting approach to optimizing inventory and its valuation. Contrast this approach to the current system used by TK. (5 Marks)
f. Explain the importance of identifying scarce resources when preparing budgets and the use of linear programming to determine the optimum use of resources. (6 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q2 – Costing Systems and Techniques

Analyze the profit-maximizing output using marginal costing and throughput accounting for two products, and compare both methods.

Ideal Nigeria Limited manufactures two products, Light and Medium, on the same machines. Sales demand for the products exceeds the machine capacity of the company’s production department. The potential sales demand in each period is for 10,000 units of Light and 15,000 units of Medium. Sales prices cannot be increased due to competition from other producers in the market. The maximum machine capacity in the production department is 40,000 hours in each period.

The following cost and profitability estimates have been prepared:

Light Medium
Sales price N110 N135
Direct materials N50 N45
Direct labour and variable overhead N30 N55
Contribution per unit N30 N35
Machine hours per unit 1.5 hours 2 hours

Fixed costs in each period are N450,000.

Required:
a. Using marginal costing principles, calculate the profit-maximizing output in each period, and the amount of profit. (4 Marks)
b. Explain how throughput accounting differs from marginal costing in its approach to maximizing profit. (4 Marks)
c. Using throughput accounting, calculate the throughput accounting ratio for Light and Medium. (8 Marks)
d. Using throughput accounting principles, calculate the profit-maximizing output in each period, and the amount of profit. (4 Marks)

 

 

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  • 20 Marks

PM – Nov 2021 – L2 – Q3 – Costing Systems and Techniques

Calculate profit-maximizing output using both marginal and throughput accounting principles and compare the approaches for Kahkiri Limited.

The following cost and profitability estimates have been prepared:

Product X Y
Sales price 44 54
Direct materials 20 18
Direct Labour 6 11
Variable overhead 6 11
Contribution per unit 12 14
Attributable fixed cost N10,000 N10,000
Machine hours per unit 1.5 hours 2 hours

Fixed costs in each period are N100,000.

Required:
a. Using marginal costing approach, calculate the profit-maximising output for the period, and the associated profit for each product and the company. (4 Marks)
b. What are the advantages of throughput accounting over marginal costing method in profit-maximising decisions? (4 Marks)
c. Calculate the throughput accounting ratio for Product X and for Product Y. (8 Marks)
d. Using throughput accounting principles, calculate the profit-maximising output in each period, and calculate the amount of the profit. (4 Marks)

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  • 30 Marks

PM – Nov 2021 – L2 – Q1 – Budgeting and Budgetary Control

Explore material input constraints, determine optimal production, and evaluate outsourcing and penalties for non-fulfillment of orders.

Kikelomo Limited manufactures three products K, T, and F, using different quantities of the same resources. Budget information per unit is provided:

K T F
Market selling price 1,800 2,520 3,000
Direct labour (₦140/hour) 280 560 700
Material A (₦60/kg) 300 240 420
Material B (₦120/kg) 480 720 600
Variable overhead (₦80/hour) 160 320 400
Fixed overhead 240 140 240
Total cost 1,460 1,980 2,360
Profit 340 540 640
Total budgeted sales units 500 800 1,600

The budgeted sales are for the month of June but do not include an order from a major customer to supply 400 units per month of each of the three products at a discount of ₦200 per unit. During June, management anticipates a shortage of material B, with only 17,500 kgs available. Kikelomo Ltd cannot hold inventory of raw materials, work-in-progress, or finished products.

Required:
a. State THREE factors that may cause input materials to be a budget constraint and identify steps to overcome this constraint. (6 Marks)
b. Prepare calculations to show production that will maximise Kikelomo Ltd’s profit for June. (9 Marks)
c. Kikelomo Ltd has realised that the contract with the major customer does not have to be fully met, but a financial penalty may apply. Calculate the lowest value of the financial penalty to ensure the order is met in full. (6 Marks)
d. Assume the material B shortage will continue and management has decided to outsource some production. Advise management on the advantages and disadvantages of outsourcing. (9 Marks)

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  • 6 Marks

QTB – Nov 2015 – L1 – SB – Q2c – Mathematics of Business Finance

Find the level of output at which profit is maximized using given revenue and cost functions.

Given that the Total Revenue (TR) function is:

a

and the Total Cost (TC) function is:

Determine the level of output at which profit is maximized. (6 Marks)

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  • 14 Marks

BMF – May 2018 – L1 – SB – Q5a – Basics of Business Finance and Financial Markets

Discusses weaknesses of commonly-used corporate financial objectives.

Corporate financial objectives may be expressed as maximizing shareholders’ wealth, as well as profit or growth in earnings. State and explain briefly the weaknesses of THREE commonly-used corporate financial objectives.

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  • 4 Marks

MA – Nov 2024 – L2 – Q5b – Profit Maximization and Batch Selection

Determination of the optimal number of printer batches to import and sell to maximize profit.

Awuah deals in online business, importing and selling printers. The cost of each set of printers varies depending on the number purchased, although printers can only be purchased in batches of 1,000 units. Awuah also has to pay import taxes which vary according to the quantity purchased. Awuah has already carried out some market research and identified that sales quantities are expected to vary depending on the price charged.

The following data has been established for the first month:

Number of Batches Imported and Sold Average Cost per Unit (Including Import Taxes) (GH¢) Total Fixed Costs per Month (GH¢) Expected Selling Price per Unit (GH¢)
1 10.00 10,000 20
2 8.80 10,000 18
3 7.80 12,000 16
4 6.40 12,000 13

Required:

Determine the number of batches of printers Awuah should import and sell to maximize profit.

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  • 16 Marks

MA – Nov 2024 – L2 – Q5a – Limiting Factor Decision and Profit Maximization

Determination of the optimum production plan considering scarce resources.

Manche 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:

Product C L
Unit Selling Price (GH¢) 130 160
Resources per Unit:
Direct Labour (GH¢8 per hour) 3 hours 5 hours
Material A (GH¢3 per kg) 5 kg 4 kg
Material B (GH¢7 per litre) 2 litres 1 litre
Machine Hours (GH¢10 per hour) 3 hours 4 hours
Fixed Overhead (GH¢8 per hour) 1 hour 1 hour

Market research shows that the maximum demand for products C and L during August 2024 is 500 units and 800 units respectively. This does not include an order that Manche has agreed with a commercial customer for the supply of 250 units of C and 350 units of L at selling prices of GH¢100 and GH¢135 per unit, respectively. Failure by Manche to deliver the order in full by the end of August will cause Manche to incur a GH¢5,000 financial penalty.

At a recent meeting between the Purchasing Manager and Production Manager to discuss the production plans of C and L for August, the following resource restrictions for the year were identified:

  • Direct Labour Hours: 90,000 hours
  • Machine Hours: 90,000 hours

The resource restrictions were evenly distributed throughout the year.

Required:

i) Prepare the optimum production plan for August 2024 using relevant computations. 
ii) Determine the contribution from adopting this plan. 
iii) Using relevant computations, show whether Manche should complete the order from the commercial customer assuming any excess labour hours for not making the contract can be used to produce 300 units of product ‘F’ with a contribution of GH¢55 per unit.

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  • 1 Marks

BMF – Nov 2020 – L1 – SA – Q12 – Basics of Business Finance and Financial Markets

Identify the term for strategies maximizing profits through innovative financial methods.

Strategies adopted by companies to maximize profits using innovative methods to compute the fair value of financial instruments is best described as:
A. Financial accounting
B. Financial engineering
C. Strategic financial management
D. Strategic management accounting
E. Strategic financial accounting

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  • 15 Marks

PM – May 2024 – L2 – SC – Q7 – Cost-Volume-Profit (CVP) Analysis

Analysis of production constraints to determine optimal production levels and profit maximization using contribution analysis.

Jumbo Tailors Nigeria Limited manufactures three unique wears for which the maximum revenue for the coming year is estimated as follows:

Product Estimated Revenue (₦)
Trousers 8,250,000
Jackets 9,880,000
Skirts 12,390,000

Summarized unit cost data are as follows:

Product Direct Material (₦) Direct Labour (₦) Variable Costs (₦) Fixed Costs (₦)
Trousers 1,000 500 800 250
Jackets 900 450 1,600 500
Skirts 700 350 1,000 400

The allocation of fixed costs was derived from last year’s production level and may be reviewed if current output plans differ.

Estimated Selling Prices:

  • Trousers: ₦3,300
  • Jackets: ₦3,800
  • Skirts: ₦2,950

The products are processed on sewing machines housed in three blocks. Block A contains type I machines, with an estimated maximum machine hour capacity of 39,200 hours and a fixed overhead cost of ₦1,960,000 per annum. Block B contains type II machines, with 20,000 machine hours available and a fixed overhead cost of ₦1,500,000 per annum. Block C also contains type II machines, with 16,000 machine hours available and a fixed overhead cost of ₦740,000 per annum.

The required machine hours per unit of output for each product on each machine type are as follows:

Product Type I Machine (hours) Type II Machine (hours)
Trousers 2 3
Jackets 4 6
Skirts 6 2

Required:
a. Determine the optimal production plan which Jumbo Tailors Nigeria Limited should adopt. (12 Marks)
b. Calculate the total profit that would be made if the production plan in (a) above is adopted. (3 Marks)

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  • 30 Marks

PM – May 2024 – L2 – SA – Q1 – Costing Systems and Techniques

Calculation of machine utilization rates, identification of bottlenecks, and application of throughput accounting.

Tani Kamac (TK) makes three products A, B, and C. All three products must be offered for sale each month to provide a complete market service. The products are fragile, and their quality deteriorates rapidly once they are manufactured. The products are produced on two types of machines and worked on by a single grade of direct labor. Five direct employees are paid ₦80 per hour for a guaranteed minimum of 160 hours each per month. All products are first molded on machine type 1 and then finished and sealed on machine type 2. The machine hours required for each product are as follows:

Product A (hrs/unit) Product B (hrs/unit) Product C (hrs/unit)
Machine 1 1.5 4.5 3.0
Machine 2 1.0 2.5 2.0

The capacity of machine type 1 is 600 hours per month, and machine type 2 is 500 hours per month.

Additional details:

Product A Product B Product C
Selling Price (₦) 910 1,740 1,400
Component Cost (₦) 220 190 160
Other Direct Material Cost (₦) 230 110 140
Direct Labor Cost at ₦80/hr 60 480 360
Overheads (₦) 240 620 520
Profit (₦) 160 340 220
Maximum Monthly Demand (units) 120 70 60

TK uses marginal costing and contribution analysis for decision-making, while profits are reported using absorption costing.

Required:
a. Calculate the machine utilization rate per month for each machine and explain which of the machines is the bottleneck/limiting factor. (4 Marks)
b. Using the current system of marginal and contribution analysis, calculate the profit-maximizing monthly output of the three products. (4 Marks)
c. Explain why throughput accounting might provide more relevant information in TK’s circumstances. (6 Marks)
d. Using a throughput approach, calculate the throughput-maximizing monthly output of the three products. (5 Marks)
e. Explain the throughput accounting approach to optimizing inventory and its valuation. Contrast this approach to the current system used by TK. (5 Marks)
f. Explain the importance of identifying scarce resources when preparing budgets and the use of linear programming to determine the optimum use of resources. (6 Marks)

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  • 20 Marks

PM – Nov 2020 – L2 – Q2 – Costing Systems and Techniques

Analyze the profit-maximizing output using marginal costing and throughput accounting for two products, and compare both methods.

Ideal Nigeria Limited manufactures two products, Light and Medium, on the same machines. Sales demand for the products exceeds the machine capacity of the company’s production department. The potential sales demand in each period is for 10,000 units of Light and 15,000 units of Medium. Sales prices cannot be increased due to competition from other producers in the market. The maximum machine capacity in the production department is 40,000 hours in each period.

The following cost and profitability estimates have been prepared:

Light Medium
Sales price N110 N135
Direct materials N50 N45
Direct labour and variable overhead N30 N55
Contribution per unit N30 N35
Machine hours per unit 1.5 hours 2 hours

Fixed costs in each period are N450,000.

Required:
a. Using marginal costing principles, calculate the profit-maximizing output in each period, and the amount of profit. (4 Marks)
b. Explain how throughput accounting differs from marginal costing in its approach to maximizing profit. (4 Marks)
c. Using throughput accounting, calculate the throughput accounting ratio for Light and Medium. (8 Marks)
d. Using throughput accounting principles, calculate the profit-maximizing output in each period, and the amount of profit. (4 Marks)

 

 

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  • 20 Marks

PM – Nov 2021 – L2 – Q3 – Costing Systems and Techniques

Calculate profit-maximizing output using both marginal and throughput accounting principles and compare the approaches for Kahkiri Limited.

The following cost and profitability estimates have been prepared:

Product X Y
Sales price 44 54
Direct materials 20 18
Direct Labour 6 11
Variable overhead 6 11
Contribution per unit 12 14
Attributable fixed cost N10,000 N10,000
Machine hours per unit 1.5 hours 2 hours

Fixed costs in each period are N100,000.

Required:
a. Using marginal costing approach, calculate the profit-maximising output for the period, and the associated profit for each product and the company. (4 Marks)
b. What are the advantages of throughput accounting over marginal costing method in profit-maximising decisions? (4 Marks)
c. Calculate the throughput accounting ratio for Product X and for Product Y. (8 Marks)
d. Using throughput accounting principles, calculate the profit-maximising output in each period, and calculate the amount of the profit. (4 Marks)

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  • 30 Marks

PM – Nov 2021 – L2 – Q1 – Budgeting and Budgetary Control

Explore material input constraints, determine optimal production, and evaluate outsourcing and penalties for non-fulfillment of orders.

Kikelomo Limited manufactures three products K, T, and F, using different quantities of the same resources. Budget information per unit is provided:

K T F
Market selling price 1,800 2,520 3,000
Direct labour (₦140/hour) 280 560 700
Material A (₦60/kg) 300 240 420
Material B (₦120/kg) 480 720 600
Variable overhead (₦80/hour) 160 320 400
Fixed overhead 240 140 240
Total cost 1,460 1,980 2,360
Profit 340 540 640
Total budgeted sales units 500 800 1,600

The budgeted sales are for the month of June but do not include an order from a major customer to supply 400 units per month of each of the three products at a discount of ₦200 per unit. During June, management anticipates a shortage of material B, with only 17,500 kgs available. Kikelomo Ltd cannot hold inventory of raw materials, work-in-progress, or finished products.

Required:
a. State THREE factors that may cause input materials to be a budget constraint and identify steps to overcome this constraint. (6 Marks)
b. Prepare calculations to show production that will maximise Kikelomo Ltd’s profit for June. (9 Marks)
c. Kikelomo Ltd has realised that the contract with the major customer does not have to be fully met, but a financial penalty may apply. Calculate the lowest value of the financial penalty to ensure the order is met in full. (6 Marks)
d. Assume the material B shortage will continue and management has decided to outsource some production. Advise management on the advantages and disadvantages of outsourcing. (9 Marks)

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  • 6 Marks

QTB – Nov 2015 – L1 – SB – Q2c – Mathematics of Business Finance

Find the level of output at which profit is maximized using given revenue and cost functions.

Given that the Total Revenue (TR) function is:

a

and the Total Cost (TC) function is:

Determine the level of output at which profit is maximized. (6 Marks)

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  • 14 Marks

BMF – May 2018 – L1 – SB – Q5a – Basics of Business Finance and Financial Markets

Discusses weaknesses of commonly-used corporate financial objectives.

Corporate financial objectives may be expressed as maximizing shareholders’ wealth, as well as profit or growth in earnings. State and explain briefly the weaknesses of THREE commonly-used corporate financial objectives.

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