Question

Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products. Electric Mixer Blender $ 25 43 19 Direct material Direct labor Manufacturing overhead @ $52 per machine hour Cost if purchased from an outside supplier Annual demand (units) 52 32 104 115 32,000 67 27,000 Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $40. Kitchen Magician's management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers. Required: 1. If 53,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased? 2. With all other things constant, if management is able to reduce the direct material for an electric mixer to $25 per unit, how many units of each product should be manufactured? Purchased?

Answer 1

1						Blender	Mixer
	Cost of purchased from an outside supplier					67	115
	Less:
	Direct material					25	43
	Direct labor					19	32
	Manufacturing overhead				(Note:1)	12	24
	Total variable costs					56	99
	Cost savings					11	16
	Machine hours per unit					1	2
	Cost savings per machine hour					11	8
	Rank					1	2
	Conclusion:
	Available machine hours					53000	Hours
	Machine hours needed for 27000 blenders				(27000*1)	27000	Hours
	Balance MH available					26000	Hours
	Mixers that can be produced				(26000/2)	13000	Units
	Additional mixers to be purchased
	(32000-13000)					19000	Units
			Blender	Mixer
	Manufacture		27000	13000
	Purchase			19000
	Note:1
						Blender	Mixer
	Manufacturing overhead				a	52	104
	Manufacturing OH rate per machine hour				b	52	52
	Machine hours per unit				c=a/b	1	2
	Variable manufacturing overhead per unit
						Blender	Mixer
	Manufacturing overhead				a	52	104
	Less: Fixed cost		($ 40 per machine hour)			40	80
						(40*1)	(40*2)
	Variable manufacturing overhead					12	24
2						Blender	Mixer
	Cost of purchased from an outside supplier					67	115
	Less:
	Direct material					25	25
	Direct labor					19	32
	Manufacturing overhead				(Note:1)	12	24
	Total variable costs					56	81
	Cost savings					11	34
	Machine hours per unit					1	2
	Cost savings per machine hour					11	17
	Rank					2	1
	Conclusion:
	Available machine hours					53000	Hours
	Mixers that can be produced				(53000/2)	26500	Units
	Additional mixers to be purchased				(32000-26500)	5500	Units
	Blenders that can be purchased					27000	Units
			Blender	Mixer
	Manufacture			26500
	Purchase		27000	5500