Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available. Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month Product G $ 50 10 $ 40 Product B $ 80 48 $ 32 1.0 hours 200 units 0.4 hours 600 units The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $4,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Answer 1

1		Product G	Product B
	Contribution margin per unit	40.00	32.00
	Machine hours per unit	0.4	1.0
	Contribution margin per machine hour	100.00	32.00
		Product G	Product B	Total
	Maximum number of units to be sold	600	200
	Hours required to produce maximum units	240	200	440
2		Product G	Product B	Total
	Hours dedicated to the production of each product*	176	0	176
	Units produced for most profitable sales mix	440	0
	Contribution margin per unit	$         40.00	0
	Total contribution margin - one shift	$       17,600	0	$       17,600
	*Total hours = 8 hours x 22 days = 176
3		Product G	Product B	Total
	Hours dedicated to the production of each product*	240	112	352
	Units produced for most profitable sales mix	600	112
	Contribution margin per unit	$         40.00	$       32.00
	Total contribution margin-two shifts	$       24,000	$       3,584	$       27,584
	Total contribution margin-one shift	$       17,600	$              -	$       17,600
	Incremental contribution margin			$         9,984
	Incremental fixed costs			$         4,000
	Incremental operating income (loss)			$         5,984
	Should company add another shift?	Yes
	*Total hours = 8 hours x 22 days x 2 shifts = 352
4		Product G	Product B	Total
	Hours dedicated to the production of each product	280	72	352
	Units produced for most profitable sales mix	700	72
	Contribution margin per unit	$         40.00	$       32.00
	Total contribution margin-two shifts and marketing campaign	$       28,000	$       2,304	$       30,304
	Total contribution margin-two shifts	$       24,000	$       3,584	$       27,584
	Incremental contribution margin	$         4,000	$     -1,280	$         2,720
	Incremental fixed costs			$         4,000
	Incremental marketing costs			$         3,000
	Incremental operating income (loss)			$        -4,280
	Should company pursue this strategy?	No