Question

Mack Co. manufactures four different products. Because the quality of its products is high, the demand for them is more than the company can produce. Based on the enquiries made by the current and potential customers, you have estimated the following for the coming year:

Product A: Estimated demand in units = 8,000 Sell price per unit = $50 direct materials cost per unit = $5 and direct labour cost per unit = $5

Product B: Estimated demand in units = 24,000 Sell price per unit = $60 direct materials cost per unit = $10 and direct labour cost per unit = $9

Product C: Estimated demand in units = 20,000 Sell price per unit = $150 direct materials cost per unit = $25 and direct labour cost per unit = $30

Product D: Estimated demand in units = 30,000 Sell price per unit = $100 direct materials cost per unit = $15 and direct labour cost per unit = $20

The following info is also available:

1. the direct labour rate is $15 per hour and the factory has a capacity of 80,000 hours. For the next year, Mack is unable to expand this capacity.
2. Mack is unwilling to increase its selling prices
3. Apart from direct materials and direct labour, the only other variable expense is variable overhead. the variable overhead is 50% of the direct labour cost
4. fixed manufacturing overhead is estimated to be $1 million for the coming year. Fixed marketing and admin expenses are estimated to be $750,000 for the coming year

Problem: calculate the contribution margin and prepare incremental analysis for maximizing operating income. Determine which products and how many units of each Mack should produce in the coming year to maximize its operating income

Textbook provides one answer = produce 11,467.50 units of C.

*** please do NOT answer this using excel.

Answer 1

Given Information Particulars Product B S.No Product A Product C Product D Estimated Demand (In Units) Selling Price ($) Direct materials ($ Direct Labour ($ Direct Labour (In Hrs.) per Unit (4/"15") 8,000 30,000 | 24,000 20,000 2 50 60 150 100 25 15 10 4 5 30 20 0.33 0.60 2.00 1.33 5 Required Direct Labour (In Hrs.) 6 2,667 14,400 40,000 40,000 for the estimated Demand Total No. of Hours required for the estimated demand = 2,667 14,40040,000 + 40,000 = 97,067 Hours But, the No. of Hours available for the produvtion 80,000 Hours Therefore, there is a So, the production to be made in such a way that the contribution achieved is the maximum by using the limiting factor appropriately. This can be done by producing the products which gives the maximum contribution per limiting factor (i.e., Direct Labour Hour) shortage of 17,067 Hours. Determination of Contribution Per Unit and Contribution per Direct Labour hr.: Particulars Product A Product B Product C Product D S.No Selling Price Less: Variable Costs 150 1 50 60 100 2 a. Direct Materials 15 5 10 25 b. Direct labour 5 30 20 c. Variable Overheads 4.50 2.50 15.00 10.00 3 Contribution (1-2(a+b+c)) Hours required per Unit Contribution per Hour (3/4) Ranking of Product 37.50 36.50 80.00 55.00 0.60 2.00 4 0.33 1.33 5 112.50 60.83 40.00 41.25 6 IV II >

As the contribution given by the Product C is less than than all other products, it should be produced only if there is any balance direct labour hours after producing all the estimated demand of other products Allocation of Direct Labout Hours to maximise the Contribution and Operating Income: Labour Cumulative Labour Particulars Demand Hours per Labour S.No Hours Unit Hours Product A 1 8,000.00 0.33 2,667 2,667 17,067 2 Product B 0.60 14,400 40,000 24,000.00 Product D 30,000.00 1.33 57,067 80,000 Product C 4 11,466.67 2.00 22,933 Due to the rounding off differences, the No. of Units of Product C is 11,467.67 But, in the below calculation, it has been taken as 11,467.50 Units of Product C. Determination of Profit Particulars Product A Product B Product C Product D S.No Demand 8,000 24,000 11,468 30,000 Contribution per Unit ribuition (1*2) 2 37.50 80.00 55.00 36.50 3,00,000 8,76,000 9,17,400 16,50,000 3 C 37,43,400 Total Contribution 4 Less : Fixed Costs 5 a. Manufacturing Overheads b. Admin & Marketing Expenses -10,00,000 -7,50,000 6 Net Profit 19,93,400

Answer has been solved using MS Word, All the calculations has been given. So, it is easy to understand the calculations.