Question

Glover Company makes three products in a single facility. These products have the following unit product costs:

 

	Product
	A		B		C
Direct materials	$	34.90	$	51.40	$	57.80
Direct labor		22.30		24.90		15.70
Variable manufacturing overhead		2.10		1.50		1.40
Fixed manufacturing overhead		12.00		7.60		8.20
Unit product cost	$	71.30	$	85.40	$	83.10

 

Additional data concerning these products are listed below.

 

	Product
	A		B		C
Mixing minutes per unit		1.30		1.10		0.40
Selling price per unit	$	79.00	$	101.40	$	94.90
Variable selling cost per unit	$	2.70	$	3.20	$	3.00
Monthly demand in units		2,900		4,200		2,200

 

The mixing machines are potentially the constraint in the production facility. A total of 9,170 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

 

Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all three products?

b. How much of each product should be produced to maximize net operating income?

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

a.	Total Minutes Required = 9,270
		Products
		A	B	C
	Mixing Minutes per unit	1.3	1.1	0.4
	The monthly maximum demand in units	2900	4200	2200
	Total Mixing Minutes per unit	3770	4620	880
	Total Minutes for all products = 3,770 + 4,620 + 880 = 9,270
b.		Products
		A	B	C
	Optimal Production	2350	4620	2200
		Products
		A	B	C
	Selling price per unit (a)	$    79.00	$ 101.40	$    94.90
	Direct Material	$    34.90	$    51.40	$    57.80
Add:	Direct Labour	$    22.30	$    24.90	$    15.70
Add:	Variable manufacturing overhead	$       2.10	$       1.50	$       1.40
Add:	Variable selling cost per unit	$       2.70	$       3.20	$       3.00
	Total Variable cost per unit (b)	$    62.00	$    81.00	$    77.90
	Contribution Margin per unit (a) - (b)	$    17.00	$    20.40	$    17.00
Divide by:	Mixing Minutes per unit	1.3	1.1	0.4
	Contribution Margin per minute	$    13.08	$    18.55	$    42.50
	Rank in terms of profitability	3	2	1
	Optimal Production	2350*	4620	2200
	*(9170-2200-4620)
c.	Maximum amount = $ 828
	The company should be willing to pay not more than the lowest amount of contribution margin. Since the lowest contribution margin is $ 13.80 per minute i.e $13.80 X 60 = $ 828 per hour.