Optimal Short Run

Question 2-6

1.What do you think is the optimal short run production mix?

The choice of the optimal allocation of the constraining factors of production depends critically on the estimates of the parameters used in the model. The optimal short run production mix is the one which maximizes the contribution margin. For example, in our case, Princess and Division firm is using partners, associates and staffpersons for their auditing and consulting works in different combinations. To get the maximum contribution margin, the allocation of the resources has to be properly scheduled. Then it needs to be decided in which combination the contribution margin is maximized.

2. Using the blended cost calculation , what is the optimal short run production mix

The blended cost per hour is calculated per hour of client time as given below.

item partner associate staff Total

|Salaries 140,000*10 50,000*30 30,000*25 3,650,000

Hours worked 10*2800 30*2000 25*1900 135,500

Flexible costs 10*2800*3 30*2000*12 25*1900*7 1,136,500

Other costs 1,000,000

Total costs 5,786,500

Blended cost per hour $42.70

Audit cost per hour 2*42.70 4*42.70 4*42.70 $427.05

Consulting cost per hour 3*42.70 2*42.70 2*42.70 $298.93

The market rate is $510 per client hour demanded for audit services and $340 per Client hour demanded for consulting services. The demand is gradually increasing.

Suppose the 50% of the time is allotted for auditing and 50% for consulting by the parners , associates and staff persons, then

item partner associate staff Total

Audit cost 1400*427.05 1000*427.05 950*427.05 1,430,618

Consultant cost 1400*298.355 1000*298.35 950*298.35 1,001,416

Total cost expended 2,432,034

Income from audits 1400*510 1000*510 950*510 1,708,500

Income from consultants 1400*340 1000*340 950*340 1,139,000

2,847,500

Contribution margin 415,466

Suppose the 40% of the time is allotted for auditing and 60% for consulting by...