Question

Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales pric demand, and use of manufacturing inputs follow. Basic $ Classic 77 9,000 $ Formal 190 26,000 16,000 Sales price Maximum annual demand (units) Input requirement per unit Direct material Direct labor 0.5 yards 0.8 hours 0.3 yards 3 hours 0 .6 yards 9 hours Costs Variable costs Materials Direct labor Factory overhead Marketing Annual fixed costs Manufacturing Marketing Administration 16 per yard 12 per hour 3 per direct labor-hour 10 % of sales price $48,000 $14,000 $42.000 The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 30,500 direct labor-hours per year caused by the plant layout. Required: a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below 0-2. How much operating profit could the company earn if it were able to satisfy the annual demand? b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor. b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor? c. Given the information in the problem so far, what product mix do you recommend? d-1. Calculate the contribution margin for each type of dress shirt using the table below. d-2. How much operating profit should your recommended product mix generate? e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 16.000 more hours. The direct labor cost would increase from $12 to $16 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?

Answer 1

a-1 Contribution Margin = Sales - Variable cost
	Basic	Classic	Formal
Selling price	26	77	190
Material	0.5	0.3	0.6
Labor	0.8	3	9
Material	16
Labor	12
Overhead	3
Demand	16000	9000	26000
	Basic	Classic	Formal
Total revenue	416,000	693,000	4,940,000
Total variable costs
Material	128,000	43,200	249,600
Labor	153,600	324,000	2,808,000
Overhead	38,400	81,000	702,000
Marketing	41,600	69,300	494,000
Total	361,600	517,500	4,253,600
Contribution Margin	54,400	175,500	686,400
a-2 Operating profit = Contribution Margin - fixed costs = 916300-104000 = $812300
	Basic	Classic	Formal
Contribution Margin per shirt	3.4	19.5	26.4
CM per labor hour	4.25	6.5	2.933333
b-2 Most profitable is Classic
Mix is Classic and Basic
Units of classic = 9,000 units, hours = 9,000*3 = 27,000
Basic = 30500-27,000 = 3,500/0.8 = 4,375 units
d-1
	Basic	Classic
Total revenue	113,750	693,000
Total variable costs
Material	35,000	43,200
Labor	42,000	324,000
Overhead	10,500	81,000
Marketing	11,375	69,300
Total	98,875	517,500
Contribution Margin	14,875	175,500
d-2 Operating profit = 190,375-104,000 = $86375
Should manufacture Basic