Question

Holton Company makes three products in a single facility. Data concerning these products follow:

	Product
	A		B		C
Selling price per unit	$	150.90	$	76.30	$	170.90
Direct materials	$	65.60	$	42.50	$	102.80
Direct labor	$	47.20	$	13.50	$	30.80
Variable manufacturing overhead	$	9.00	$	4.50	$	14.30
Variable selling cost per unit	$	24.40	$	3.30	$	8.80
Mixing minutes per unit		43.30		4.00		4.00
Monthly demand in units		3,000		1,000		2,000

The mixing machines are potentially the constraint in the production facility. A total of 14,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all three products?

b. How much of each product should be produced to maximize net operating income?

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

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Holton Company
Answer a
Product	A	B	C	Total	Note
Mixing machine time per unit (minutes)	43.30	4.00	4.00		A
Monthly demand in units	3,000.00	1,000.00	2,000.00		B
Total Mixing machine time (minutes)	129,900.00	4,000.00	8,000.00	141,900.00	C=A*B
So total mixing time required is 141,900 minutes.
Answer b
Answer 3- Contribution margin per mixing minute	A	B	C
Selling price per unit	150.90	76.30	170.90		Note
Direct Material per unit	65.60	42.50	102.80
Direct Labor cost per unit	47.20	13.50	30.80
Variable manufacturing overhead	9.00	4.50	14.30
Variable selling cost per unit	24.40	3.30	8.80
Contribution per unit ($)	4.70	12.50	14.20		D
Mixing machine time per unit (minutes)	43.30	4.00	4.00		E
Contribution per minute ($)	0.11	3.13	3.55		F=D/E
Contribution per hour ($)	6.51	187.50	213.00		G=F*60
To maximize net operating income that product will be produced first whose contribution per minute is highest.
	A	B	C
Contribution per direct labor hour	0.11	3.13	3.55
Rank	3	2	1
Demand (Units)	3,000.00	1,000.00	2,000.00
Mixing machine time per unit (minutes)	43.30	4.00	4.00
Mixing time available		14,000.00
Demand for Product C	2,000.00		Product C has highest contribution per minute so it should be made first.
Mixing time for Product C		8,000.00
Mixing time available		6,000.00
Demand for Product B	1,000.00		Product B has second highest contribution per minute so it should be made after Product C.
Mixing time for Product B		4,000.00
Mixing time available		2,000.00			Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap Bitmap
Mixing time per unit of Product A		43.30
Number of units of Product A		46.19	As Product A has lowest contribution per minute so in the remaining mixing time Product A should be made.
Contribution statement	A	B	C	Total	Note
Contribution per unit ($)	4.70	12.50	14.20		See D
Number of units	46.19	1,000.00	2,000.00		See B
Contribution ($)	217.09	12,500.00	28,400.00	41,117.09	H=D*B
So highest total contribution margin company can earn is $ 41,117.09.
Answer c
The maximum additional machine cost per hour can be paid may equal to extra contribution earned per hour and that is contribution per hour of Product A.
Because the demand of all other products are already fulfilled by the existing machine time so machine time will be used only for Product A.
So the maximum additional machine cost per hour will be $ 6.51 which is the contribution per hour of Product A above the current rate per hour of mixing machine.