Question

THE Company produces two products, vases and bowls. The variable costs of producing a vase and a bowl are $22 and $16, respectively. The selling price for a vase is $34 and the selling price for a bowl is $25. THE Company currently has 50 employees who are equally capable of producing both vases and bowls. On average, it takes 4 hours to manufacture a bowl and 5 hours to manufacture a vase. After the products are built they need to be painted, with each vase requiring cans of paint and each bowl requiring 8 cans of paint. For the coming year, THE Company has 160,000 cans of paint available and each employee is expected to work 2,400 hours. Calculate the maximum amount of contribution margin THE Company can earn in the coming year.

Answer 1

SOLUTION GIVEN VASE BOWL 34 25 SELLING PRICE less: VARIABLE COST CONTRIBUTION PER UNIT 22 16 12 9 5 4 NO OF LABOUR HRS PER UNIT PAINT CANS REQUIRED FOR PER UNIT 2 8 CONSTRAINS (LIMITED RESOURCES TO PRODUCE) 1) LABOUR HOURS 2) PAINT CANS (2400*50) 120000 HOURS 180000 CANS BOWL a) CONTRIBUTION FOR PER UNIT OF CONTRAIN RESOURCE USED VASE SELLING PRICE VARIABLE COST 34 25 22 16 12 9 CONTRIBUTION PER UNIT (SELLING PRICE - VARIABLE COST) NO OF LABOUR HRS FOR PER UNITMANUFACTURED 5 4 2.4 2.25 CONTRIBUTION PER HRS EMPLOYED (CONTRIBUTION/NO OF HOURS) PAINT CANS REQUIRED FOR PER UNIT 2 8 6 1.125 CONTRIBUTION PER PAINT CAN USED (CONTRIBUTION/NO OF CANS) Note: as contribution (profit) per unit of contraint is high in case of VASE it is advisable to produce VASE only for Maximum Profit

b) For Maximum Contribution (Profit) IF ONLY VASE PRODUCE MAXIMUM UNITS THAT CAN BE PRODUCED CONSTRAINS (LIMITED RESOURCES TO PRODUCE) 1) LABOUR HOURS (2) PAINT CANS AVAILABILITY PER UNIT USAGE MAX PRODUCTION 120000 5 24000 180000 2 90000 MAX PRODUCTION OF VASE = 24000(MINIMUM OF 24000 & 90000) MAX CONTRIBUTION =24000*12 = 288000 c) For Minimum Profit contribution (profit) IF ONLY BOWL PRODUCE MAXIMUM UNITS THAT CAN BE PRODUCED CONSTRAINS (LIMITED RESOURCES TO PRODUCE) 1) LABOUR HOURS (2) PAINT CANS AVAILABILITY PER UNIT USAGE MAX PRODUCTION 120000 4 30000 180000 8 22500 MAX PRODUCTION OF BOWL = 22500(MINIMUM OF 30000 & 22500) MINIMUM CONTRIBUTION =22500+9 = 202500 d) If we Decide to Produce 1 Unit of bowl units Profit Per Unit Total Profit 1 9 9 Bowl Vase 23996 12 287952 Total 287961 Note: For 1 unit of bowl we required 8 Cans of Paints So we have to reduce production 4 units of vase fall in profit by producing 1 unit of bowl =288000-287961 =39