Question

Christine's Chronographs makes two models of a high-end watch the model 94 and the model 101. Both models go through a special polishing step that requires the use of the single polishing machine at the company. The price and costs of the two models appear os follows Price per watch Variable cost per watch Polishing hours per watch Model 94 Model 101 $ 4,500 $ 8,500 $ 2,300 $4,600 The polishing machine used for both models has a capacity of 12,000 hours annually. Fixed manufacturing costs are $7.200.000 annually Required: a. Suppose that the maximum annual unit sales that Christine's can achieve is 8.000 units of the Model 94 and 5,000 of the Model 101 How many units of each watch model should Christine's produce annually? b. Suppose that the maximum annual unit sales that Christine's achieve make is 6,000 units of the Model 94 and 3,000 of the Model 101. How many units of each watch model should Christine's produce annually?

Answer 1

	Model 94	Model 101
Price per watch (a)	4500	8500
Variable cost per watch (b)	2300	4600
Contribution margin (c) = (a) ÷ (b)	2200	3900
Polishing hours per watch (d)	2	3
Contribution margin per hour (c) ÷ (d)	$1100	$1300

As contribution margin per hour of model 101 is higher, the complete demand for model 101 should be satisfied first and if there are any remaining polish hours available, then they should be used for the production of model 94

Part A

Model 94	0
Model 101	4000

To produce maximum unit of model 101, there is need for 15000 polishing hours, however the capacity is of 12000 hours, thus with this capacity only 4000 units of model 101 can be produced.

Part B

Model 94	1500
Model 101	3000

To produce maximum unit of model 101, there is need for 9000 polishing hours, however the capacity is of 12000 hours, so remaining 3000 hours is used to produce model 94. With this 3000 hours, 1500 units (3000/2) of model 94 will be produced.