Question

Storage Solutions produces plastic storage bins for household storage needs. The company makes two sizes of bins: Large (50 gallon) and Regular (35 gallon) Demand for the product used to be so high that the company could sell as many of each size as it could produce. The same machinery is used to produce both The machinery is available for only 3,000 hours per period. The company can produce 10 Large bins every hour compared to 15 Regular bins in the same amour time. Fixed expenses amount to $110,000 per period. Product mix data follows: Click the icon to view the product mix analysis) (Click the icon to view the operating income from the optimal product mix.) Assume that demand for Regular bins is limited to 36,000 units and demand for Large bins is limited to 25,000 units. 1. How many of each size bin should the company make now? 2. Given this product mix, what will be the company's operating income? 3. Explain why the operating income is less than it was when the company was producing its optimal product mix. 1. How many of each size bin should the company make now? This is a product mix decision. First determine which bin size Storage Solutions should emphasize. Storage Solutions should emphasize the production of size bins since they are the size bins.

Answer 1

Product Mix Analysis
	Regular	Large
Sales Price per unit	8.1	10.5
Less: Variable cost per unit	3.5	4.2
Contribution Margin per Unit	4.6	6.3
Units per Machine Hour	15	10
Contribution Margin per Machine hour	69	63
Emphasize production of Regular Bins
Because contribution margin per machine hour is higher than the large size bins
Should produce regular first and remaining large
Make 36000 regular bins and 6000 large bins
Calculation of Operating Income
	Regular	Large	Total
Number of bins per period	36,000	6000
Contribution Margin per bin	4.6	6.3
Total contribution margin	165,600	37,800	203,400
Less: Fixed Expenses			110,000
Operating Income			93,400
It is lower since large bins are also produced which are less profitable than regular bins