Question

Wellington, Inc. manufactures three related products in its Colorado Springs facility. Relevant data are given below. The key material in these products is teflonium, a rare mineral of which there is currently a shortage. In the near future, only 23,000 pounds per month of teflonium will be available, at a price of $180/lb.

Product A        Product B            Product C

            Selling price/unit                    $1,200             $1,450             $1,950

            Cost/unit:

                        Teflonium                        360                  540                  720

                        Other materials                100                  120                  100

                        Direct labor                        90                  120                  110

                        Variable overhead             20                    20                    20

                        Fixed OH (300% of DL) 270                   360                  330

Expected monthly demand is: A, 8,000 units; B, 4,000 units; C, 1,000 units.

            Required: How much of each product should Wellington produce each month
            while the shortage lasts? Explain.

Answer 1

Answer------------

Product	Units to be Produced
A	8,000
B	1,000
C	1,000

Working

	Product
	A	B	C
Cost of Teflonium	$             360.00	$        540.00	$        720.00
Cost per pound	$             180.00	$        180.00	$        180.00
Pounds per unit	2	3	4

.

Statement of ranking indicating which product to produced first, second and third
	Product
	A	B	C
Sales price per unit	$     1,200.00	$         1,450.00	$     1,950.00
Variable cost per unit	$         570.00	$             800.00	$        950.00
Contribution margin per unit	$         630.00	$             650.00	$     1,000.00
Pounds per unit	2.00	3.00	4.00
Contribution margin per Pound	$         315.00	$             216.67	$        250.00
Ranking	I	III	II
Produce	First	Third	Second

.

Statement of Optimum mix
Product	Units to be Produced	Pound hours per unit	Pounds consumed
A	8,000	2.00	16000.00
B	1,000	3.00	3000.00
C	1,000	4.00	4000.00
Maximum Quantity			23000.00