Accounting Theory and Issues Assignment - Finance Module, Semester 1

This assignment solution focuses on accounting theory, specifically addressing how linear programming can be applied to maximize a company's profit. The solution uses the example of a company producing biker, bomber, and denim jackets, demonstrating how to determine the optimal production levels for each type to achieve maximum contribution. The assignment applies the linear programming method, comparing graphical and simplex methods, and analyzing the derived equation. It suggests that by reducing the production of denim jackets and increasing the production of biker jackets, the company can improve its overall profit. The document references relevant sources to support its analysis.

Accounting theory
and issues

1
By student name
Professor
Date: 02 September, 2017.
1 | P a g e

2
Contents
Question 2...………………………………………………………………………………………………….….3
Question 3.................……………………......................................................................6
References............................................................................................................ 9
2 | P a g e

3
Question 2
solution 2
Amount in
($)
1 Statement of Ranking
Water timer clocks Roll and Run Clocks Twist top clocks
Monthly demand (unit) 400 150 900
Selling price 10 15 10
Direct material 2 3 1.5
Direct labour 1.5 2 1.25
Variable overhead 0.38 0.5 0.31
Contribution per unit 6.12 9.5 6.94
Rank 3 1 2
Roll and Run Clocks 150* 9.5 1425
Twist top clocks 900*6.94 6246
Water timer clocks 400*6.12 2448
Total profit 10119
Statement of profit
Since we have unlimited Machine hour so we have manufacture all the product but the line of production is
a. Roll and run clock
b. Twist top clocks
c. Water timer Clocks
Because Roll and run clocks's contribution is higher than rest after that
Twist and top clocks and last Water timer clocks according to their
contribution.
3 | P a g e

4
2
Water timer clocks Roll and Run Clocks Twist top clocks
Monthly demand (unit) 400 150 900
Selling price 10 15 10
Direct material 2 3 1.5
Direct labour 1.5 2 1.25
Variable overhead 0.38 0.5 0.31
Contribution per unit 6.12 9.5 6.94
Machine Hour required per
unit 0.3 0.5 0.25
Contribution per Machine
hour 20.4 19 27.76
Ranking 2 3 1
Twist top clocks 900*27.76 24984
Water timer clocks 400*20.4 8160
Roll and Run Clocks 150*19 2850
Total profit 35994
Note; since Machine hour is constrained factor so we have manufacture on the basis of contribution per machine hour.
Statement of Ranking
Statement of profit
3
Water timer clocks Roll and Run Clocks Twist top clocks
Monthly demand (unit) 400 150 900
Selling price 10 15 10
Direct material 2 3 1.5
Direct labour 1.5 2 1.25
Variable overhead 0.38 0.5 0.31
Contribution per unit 6.12 9.5 6.94
Machine Hour required per
unit 0.3 0.5 0.25
Contribution per Machine
hour 20.4 19 27.76
Ranking 2 3 1
Statement of Ranking
4 | P a g e

5
Status
Twist top clocks 900*.25 225 Manufacture
Water timer clocks 400*.3 120 Manufacture
Roll and Run Clocks 60*.5 30 BF
only 60
unit
manufact
ure rest
90 unit
purchases
from
market
Because
we have
limiting
Machine
hous
Total Available Machine
hour 375
Statement of manufacturing hous required
5 | P a g e

6
Question no 3
solution 3
1 let x1 = Biker jacket
X2= Bomber jacket
X3= denim jacket
maximise the contribution margine
object function
Z= 18x1+15.27x2+ 12.25X3
Subject to constrain
0.3x1+.25X2+.2x3<= 1100 (Fabric constraints)
0.15x1+0.15X2+0.1x3 <= 600 (Pattern Cutting Constrain)
0.35x1+ 0.35x2+0.25X3<= 1500 (Stiching constraints)
0.1 x1+ 0.1X2+0.1X3<= 500 (inspection and packing)
where
x1>=0
x2>=0
x3>=0
futher optimal solution
Z= 18x1+15.27x2+ 12.25X3
A B C Contribution
D1 0.3 0.25 0.2 18
D2 0.15 0.15 0.1 15.27
D3 0.1 0.1 0.1 12.25
2) The linear programming method helps the company in reaching to an equation by
considering all the constraints by which the overall profit of the company will be maximum. The
same has been stated in the given question, where the company is producing three different
types of jacket- biker, bomber and denim. The company wants to make the production is such a
6 | P a g e

7
way that the overall profit that the company earns will be maximum. So by solving the same by
the excel solver, the company can reach an equation that will earn the maximum contribution.
There are two methods to do the same, the graphical method, where the company can make
graphs by plotting the constraints and considering the initial value as zero. And the other
method is the simplex method, where the company can get the optimum equation by forming
tables. By these two methods, the company can get the equation by which they can earn
maximum amount of profit in conditions where they have constraints in the choices and they
need to choose the best options so that the overall contribution is maximum (Baal et al., 2016).
Applying the same in the given question, we see that the contribution is maximum in case of
the biker jackets and the least in the bomber jackets, given by the formula-
Z= 18x1+15.27x2+ 12.25X3
As per the given solution of linear programming the equation that has been derived, will
earn the firm maximum contribution and profit. Taking into consideration all the constraints
that has been derived by the management the company will earn the maximum profit by the
equation that has been derived. Where the contribution level from the biker jackets is
maximum and that from the denim jacket is the least. So if the company wants to improve its
contribution from the given level of production and the equation derived from the linear
programming analysis, the company can do the same by reducing the production of the denim
jacket. When the company reduces that production, it leads to the generation of the machine
hours, and that machine hours can be applied in the production of the biker jackets. By this the
level of production of the biker jacket will increase and the company will earn the maximum
7 | P a g e

8
contribution from the biker jackets. So the overall contribution of the company will improve
and the company will be able to achieve the maximum profit from the same. By solving this
linear programming equation, it can be calculated how much machine hours are required in the
production of each product and to what level the company can reduce the same to make sure
that the company earns the maximum amount of profit. Hence if the company reduces the
production of the denim jackets and increases the production of the biker jackets, the company
can maximize its overall level of profit (Bromwich & Scapens, 2016).
8 | P a g e

9
Refrences
Baal, P.V., Meltzer, D. & Brouwer, W., 2016. Future Costs, Fixed Healthcare Budgets, and the Decision
Rules of Cost-Effectiveness Analysis. HEALTH ECONOMICS, 25(2), pp.237-48.
Bromwich, M. & Scapens, R.W., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, 31, pp.1-9.
9 | P a g e