Question

Case #2 Breakaway Inc. manufactures three products at its plant in Minnedosa, Manitoba: Montage, Creek, and Pulse. In this facility, production is limited to 450,000 machine hours per year. Direct material and direct labour costs are variable. To develop a production plan for the upcoming year, the company's accountant has compiled the following data: Montage Creek Pulse Total demand for 2021 350,000 350,000 350,000 Sales price per unit $20.00 $28.00 $24.00 Direct materials cost per unit $8.00 $9.00 $10.00 Direct labour cost per unit $4.00 $6.00 $5.00 Variable overhead cost per unit $4.00 $6.00 $5.00 Machine hours per unit 0.40 0.70 0.50 Required (A)Given the production constraint of 450,000 machine hours, what is the product mix that will maximize profits? (B) If the company authorizes overtime to produce more units, the direct labour cost per unit will increase by 50% due to an overtime premium. Materials cost and variable overhead cost per unit will be the same for overtime production as regular production. Should the company authorize the overtime? What would be the financial impact of doing so?

Answer 1

A) Maximum profits can be achieved at the product mix
where contribution per MH is maximum. So,
Per unit	Montage	Creek	Pulse	Total
SP	20	28	24
DM	8	9	10
DL	4	6	5
V OH	4	6	5
Contribution	4	7	4
MHs	0.4	0.7	0.5
Contri /MH	10	10	8
Preferance	I	I	II
Production:
Product mix (Pref.-wise)	350000	350000	130000
MH used	140000	245000	65000	450000
B) Contribution after Overtime hours:
Normal contribution			4
Additional Lab. Cost (50%)			2.5
Contribution on Overtime			1.5
Production (Pulse)			220000
Contribution gained			330000
Yes, authorise the overtime as contribution per
unit of Pulse product comes out to $1.5 per unit.
The total contribution increases by $330000.