Application of key factors
Quays Limited manufactures a product for which there is a shortage of the raw material known as PX. During the year to 31 March 2007, only 1000 kilograms of PX will be available. PX is used by Quays in manufacturing both product 8 and product 9. The following information is relevant:

Question

Per unit:	Product 8	Product 9
	£	£
Selling price	300	150
Less: Variable costs	[latex]\underline{200}[/latex]	[latex]\underline{100}[/latex]
Contribution	[latex]\underline{\underline{100}}[/latex]	[latex]\underline{\underline{50}}[/latex]
P/V ratio [latex](\frac{£100}{300} imes 100)[/latex] ; [latex](\frac{£50}{150} imes 100)[/latex]	[latex]\underline{33 \frac{1}{3}}[/latex]	[latex]\underline{33 \frac{1}{3}}[/latex]
Kilograms of PX required	[latex]\underline{5}[/latex]	[latex]\underline{2}[/latex]

Accepted Answer

	Product 8	Product 9
	£	£
Contribution per unit	[latex]\underline{100}[/latex]	[latex]\underline{50}[/latex]
Limiting factor per unit (kg)	[latex]\underline{5}[/latex]	[latex]\underline{2}[/latex]
Contribution per kilogram	[latex]\underline{\underline{20}}[/latex]	[latex]\underline{\underline{25}}[/latex]

Decision:
Quays should concentrate on product 9 because it gives the highest contribution per unit of limiting factor.
Check:
Maximum contribution of product 8:
200 units (1000kg/5) × contribution per unit [latex]= 200 imes £100 = \underline{\underline{£20000}}[/latex]

Maximum contribution of product 9:
500 units (1000kg/2) × contribution per unit [latex]= 500 imes £50 = \underline{\underline{£25000}}[/latex]

Question 19.10: Application of key factors Quays Limited manufactures a prod...

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Per unit:	Product 8	Product 9
	£	£
Selling price	300	150
Less: Variable costs	$\underline{200}$	$\underline{100}$
Contribution	$\underline{\underline{100}}$	$\underline{\underline{50}}$
P/V ratio $(\frac{£100}{300} \times 100)$ ; $(\frac{£50}{150} \times 100)$	$\underline{33 \frac{1}{3}}$	$\underline{33 \frac{1}{3}}$
Kilograms of PX required	$\underline{5}$	$\underline{2}$