Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available. Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month Product G $ 132 50 $ 82 0.4 hours 600 units Product B $ 160 96 $ 64 1.0 hours 150 units The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $8,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.) 1. Determine the contribution margin per machine hour that each product generates. Product Product B Contribution margin per unit $ 82.00 $ 64.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $ 205.00 $ 64.00 Product Product B Maximum number of units to be sold Hours required to produce maximum units ſ 240 150 Total 600 150 390 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product Product B Total Hours dedicated to the production of each product 176 176 Units produced for most profitable sales mix Contribution margin per unit $ 82.00 Total contribution margin-one shift $ 0

Answer 1

Please find below table useful to compute desired results: -

D =22*16 A 1 2 Selling Price per Unit 3 Variable costs per unit 4 Contribution margin per Unit 5 Machine hours to produce 1 unit 6 Maximum unit sales per month 7 Additional Fixed costs B C Product G Product B 132 160 5096 =B2-B3 =C2-C3 0.4 1600 150 8000 3. Calculation of Contribution Product G Hours dedicated to production of each product =B18 Units produced for most profitable sales mix =G3/B5 Contribution margin per units =B4 Total Contribution margin - Two shifts =G4*G5 Total Contribution margin-One Shift =D25 Change in Contribution (increase) Change in Fixed Costs Increase in profits of the company Should the company add another shift Product B =13-G3 =H3/C5 =C4 =H4*H5 =G6+H6 =G7+H7 =I6-17 =C7 =18-19 YES 9 4. 10 Max. sales 700 11 Marketing efforts 7000 12 13 1. Calculation of contribution margin per machine hour 14 Product G Product B 15 Contribution Margin per unit =B4 =C4 16 Maximum hours to produce 1 unit =B5 =C5 17 Contribution Margin per machine hour =B15/B16 =C15/C16 18 Hours required to produce maximum units =B6*B5 =C6*C5 19 20 2. Calculation of contribution margin 21 Product G Product B 22 Hours dedicated to production of each product =22*8 23 Units produced for most profitbale sales mix =D18 24 Contribution margin per units =B4 25 Total contribution margin-one shift =B23*B24 =B18+C18 4. Calculation of Operating Income loss Product G Product B Hours dedicated to production of each product =B10*B5 =115-G15 =22*16 Units produced for most profitable sales mix =G15/B5 =H15/C5 Contribution margin per units =B4 =C4 Total contribution margin - 2 shift & Mkt. Campaign =G16*G17 =H16*H17 =G18+H18 Total contribution margin - 2 shift & without Mkt. Campaign =G6 =H6 =G19+H19 Change in Contribution (increase) =118-119 Additional Mikt costs =B11 Change in Fixed Costs =C7 Change in Operating Income (loss) =I20-121-122 Should the company pursue the Mkt. campaign NO =B25+C25

End results would be as follows: -

А D E C Product B 160 3. Calculation of Contribution B Product G 132 50 82 0.4 600 96 Product G 240 600 Product B 112 112 352 2 Selling Price per Unit 3 Variable costs per unit 4 Contribution margin per Unit 5 Machine hours to produce 1 unit 6 Maximum unit sales per month 7 Additional Fixed costs 64 1.0 82 64 7,168 150 8.000 Hours dedicated to production of each product Units produced for most profitable sales mix Contribution margin per units Total Contribution margin - Two shifts Total Contribution margin-One Shift Change in Contribution (increase) Change in Fixed Costs Increase in profits of the company Should the company add another shift 49,200 31,980 56,368 31.980 24,388 8.000 16,388 YES 14 Product B | 352 72 72 1.0 7001 9 4.. 10 Max. sales 700 11 Marketing efforts 7,000 12 13 1. Calculation of contribution margin per machine hour Product G Product B 15 Contribution Margin per unit 82 64 16 Maximum hours to produce 1 unit 0.4 17 Contribution Margin per machine hour 205 64 18 Hours required to produce maximum units 240 150 19 20 2. Calculation of contribution margin Product G Product B 22 Hours dedicated to production of each product 176 23 Units produced for most profitbale sales mix 390 24 Contribution margin per units 25 Total contribution margin-one shift 31.980 82 64 4. Calculation of Operating Income loss Product G Hours dedicated to production of each product 280 Units produced for most profitable sales mix Contribution margin per units 390 || Total contribution margin - 2 shift & Mkt. Campaign 57,400 Total contribution margin - 2 shift & without Mkt. Campaign | 49,200 Change in Contribution (increase) Additional Mkt. costs Change in Fixed Costs Change in Operating Income (loss) Should the company pursue the Mkt. campaign 31,980 21 4,608 62.008 7.168 56,368 5,640 7.000 8.000 (9,360) NO 82