Question

Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow.

	Basic			Classic			Formal
Sales price	$	28		$	65		$	190
Maximum annual demand (units)		30,000			20,000			40,000
Input requirement per unit
Direct material		0.4	yards		0.2	yards		0.5	yards
Direct labor		0.6	hours		2	hours		7	hours

Costs
Variable costs
Materials	$	23	per yard
Direct labor	$	19	per hour
Factory overhead	$	3	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	46,000
Marketing	$	13,000
Administration	$	40,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 55,000 direct labor-hours per year caused by the plant layout.

Required:

a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below

a-2. How much operating profit could the company earn if it were able to satisfy the annual demand?

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor.

b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?

c. Given the information in the problem so far, what product mix do you recommend?

d-1. Calculate the contribution margin for each type of dress shirt using the table below.

d-2. How much operating profit should your recommended product mix generate?

e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 15,000 more hours. The direct labor cost would increase from $19 to $21 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?

Answer 1

23 a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below Basic 840,000 Classic 1,300,000 Formal 7,600,000 (40000*190) Total Revenue (30000*28),(20000*65) Less Variable expenses Direct Materials (30000*.4*23),(20000* 2*23) Direct Labor (30000*.6*19),(20000*2*19) Variable Overhead (30000*.6*3),(20000*2*3) Variable Marketing (10% of Revenues) Total Variable expenses Contribution Margin 276,000 342,000 54,000 84,000 756,000 84,000 92,000 760,000 120,000 130,000 1,102,000 198,000 460,000 (40000*0.5*23) 5,320,000 (40000*7*19) 840,000 (40000*7*3) 760,000 7,380,000 220,000 a-2. How much operating profit could the company earn if it were able to satisfy the annual demand? 502,000 Total Contribution Margin (84000+198000+220000) Less fixed expenses Manufacturing Marketing Administration Operating Profit 46,000 13,000 40,000 99,000 403,000

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor. Basic Classic Formal 65 190 12 133 21 Sales Revenue Less Variable expenses Direct Materials Direct Labor Variable Overhead Variable Marketing (10% of Revenues) Total Variable expenses Contribution Margin (A) Direct Labor Per Hour (B) Contribution Margin for each shirt per constrained resource (A/B) 2.80 25.20 2.80 0.6 4.67 6.50 55.10 9.90 19.00 184.50 5.50 2 4.95 0.79 b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor? 59 60 Classic 61 62 c. Given the information in the problem so far, what product mix do you recommend? 63 Maximum Hours available 55,000 First of all we will use classic most profitable (20000*2) 40,000 Remaining hours will be used for next profitable Basic (15000/-6) 25,000 64