Question

Situation Three

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

                                                                     Product A                Product B                    Product C

Direct material                                                $32.00                         $40.00                         $42.00

Direct labor                                                     22.00                         20.00                         16.00

Variable manufacturing overhead                       6.00                             8.00                           15.00

Fixed manufacturing overhead                         29.00                           38.00                         28.00    

Unit cost                                                         $89.00                         $106.00                      $101.00

Additional data concerning these products are listed below:

                                                                     Product A                  Product B            Product C

Mixing minutes per unit                                    3                              4                           2

Selling price per unit                                      $105.00                    $124.00                   130.00

Variable selling cost per unit                           $10.00                        $8.00                    $9.00

Monthly demand in units                               5,500                         4,300                     3,800

The mixing machines are potentially the constraint in the production facility. A total of 40,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

• How many minutes of mixing machine time would be required to satisfy demand for all three products?
  
• What is the contribution margin per minute individually for Products A, B, and C?

• Using only the available 40,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Round down to the nearest whole units.)

• Is there unmet demand for product(s)? If so, how much and for which product(s)?

• Assume there is unmet product demand. How much in total should Rutro be willing to pay for additional machine time?

• Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

• Is there anything misleading about the figure given for fixed manufacturing overhead?

• What is the significance of contribution margins with respect to determining how much of each product to produce to maximize profit?

• What is the significance of contribution margins with respect to determining how much Rutro should pay for additional machine time?

• Why isn’t sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?

Answer 1

			Product A	Product B	Product C	Total
Monthly Demand Units			5500	4300	3800
Mixing Minutes per unit			3	4	2
Total Mixing Minutes Required		16500	17200	7600	41300
Contribution
Selling Price			105	124	130
Variable Cost
Direct Material			32	40	42
Direct Labour			22	20	16
Variable Mfg Overhead			6	8	15
Variable Selling Cost			10	8	9
			70	76	82
Contribution Margin per Unit		35	48	48
Contribution Margin per Minute		11.7	12	24
Rank based on Minutes Available		3	2	1
Minutes Available /Required		15200	17200	7600
Units to be produced			5066	4300	3800
Unmet Demand			434
Willing to pay for additional Machine Time	15202
All the products with Selling Cost per unit
Variable Selling Cost			10	8	9
Yes, Fixed manufacturing Overhead should have not been given per unit.It should have been for the entire month.
The more the Contribution the more Fixed Cost is covered and hence more the Operating Profit.
The Contribution is over and above the Variable Cost and hence any payment for additional machine time can be maximum upto Contribution.
Because the Fixed Manufacturing Cost is included and Variable Selling Cost is excluded.