Question

Chris Eastus has just opened the Eastus Company. The company makes four products: A1 $84 8 lbs. B2 $20 2 lbs. 03 $56 5 lbs. 04 $70 3 lbs Selling price Direct material per unit Direct labor and Var OVH costs per unit Fixed costs $10,000/month $28 $5 $27 $40 All four products use the same direct material. Bistide, which costs $3 per pound. Due to restrictions by the vendor, Eastus Company can buy only 5000 pounds of Bistide each month. vemand for the Eastus Company products far exceeds the Bistide available. Due to contractual obligations, Eastus Company must produce at least 200 units of each of the four products each month. You just began work as the controller and Chris Eastus has asked you to recommend, via memorandum, how many units of each product Eastus Company should produce each month, why you recommend this mix, and what the firms' operating income would be for a typical month with this recommended product mix. Secondly, Chris Eastus has a lead on an additional source for more Bistide-she may be able to obtain an additional 1000 pounds per month from a second vendor. In the same memo, tell her the maximum price per pound you recommend she should pay for this additional 1000 pounds of Bistide and why. Explain which product(s) (and how many) she should make with it and how much total extra she could net for each $0.01 less than your recommended maximum price per pound she is able to negotiate. Note: these are not products that are restricted to integers, you may have partial products.

Answer 1

The products should be produced in the order of contribution margin per unit of constraint
	A1	B2	C3	D4
Selling price	84	20	56	70
Variable costs
Direct material	24	6	15	9
Direct labor and var OH	28	5	27	40
Contribution Margin per unit	32	9	14	21
Direct material Pounds per unit	8	2	5	3
Contribution Margin per pound	4	4.5	2.8	7
Rank	3	2	4	1
Production Schedule
Product	Units	Pounds per unit	Total Pounds	Total contribution Margin
A1	200	8	1600	6400
B2	200	2	400	1800
C3	200	5	1000	2800
D4	666.6666667	3	2000	14000
		Total	5000	25000
i.e. D should be produced after meeting minimum quantity of other products
Operating Income for a typical month = 25000-10,000 = $15000
Maximum price = Current price + Contribution Margin per pound
=3+7
=$10 per pound
since extra material will be used to produce D4
Extra income = 0.01*1000 = $10