Question

answers in red are wrong.

A B Exercise 4.34 A fire recently destroyed a substantial portion of Vaughn Company's production capacity. It will be many months before capacity can be restored. During this period, demand for the firm's products will exceed the company's ability to produce them. Per-unit data on the firm's three major products is summarized as follows: Product с Selling price $77 $88 $68 Variable costs 36 22 Fixed costs 15 20 Operating profit $26 $37 Fixed costs have been allocated to the products on the basis of the labour hours required to produce each product. The major capacity constraint is the availability of time on a processing machine. Each unit of Product A and Product C requires 2 hours of processing on the machine, whereas Product 8 requires 3 hours. 21 9 $47 Your answer is correct. Calculate contribution margin per hour for each product. (Round answers to 2 decimal places, e.g. 15.25.) Contribution margin per hour Product A 20.5 Product B 22.33 23 Product C If demand for each of the products is greater than the firm's ability to meet that demand, which product should the firm produce first? Product CV If enough capacity exists to produce two products, which product should be produced second? Product BV SHOW SOLUTION SHOW ANSWER LINK TO TEXT LINK TO TEXT x Your answer is incorrect. Try again. Assume that the firm has enough capacity to meet the demand of the two products you identified in previous part. If estimated demand for the next product to be produced exceeds capacity by 970 units, what is the maximum amount the firm would be willing to pay to increase capacity? Maximum amount the firm would be willing to pay 34920 LINK TO TEXT LINK TO TEXT x Your answer is incorrect. Try again. Management adopted your plan from first part. Shortly thereafter, a strategically important customer requested that the firm supply 530 units of Product D, which has been discontinued but could be produced again if needed. Management wants to meet the customer's request to maintain goodwill but wants to know the cost before making the decision. In the past, Product D sold for $38, incurred $23 in variable costs, was allocated $4 of fixed costs, and required 1.5 hours of processing on the machine. What is the opportunity cost of accepting the order? (Round intermediate calculations to 2 decimal places, e.g. 25.26 and final answer to o decimal places, e.g. 125.) Opportunity cost 12985

Answer 1

Question 1

Answer: Since firm decided to produce the products in the order which gives her contribution margin per hour, first it will produce product C, then product B, and then product A

It is said the estimated demand for the third product ie A exceeded by 970 units. The maximum amount that company can pay would be contribution margin earned by that excess units i.e 970*20.5 which is equal to 39,770.

The company would be ready to a maximum 39,770 for increasing its capacity. Anything more than 39,770 would result in loss to Company.

Question 2

Answer: Calculation of Opportunity Cost

Since management has adopted first plan - they would have produced product C and product B which are having maximum contribution margin per hour in comparison to Product A. So company can product product D only stopping production of product A.

Hours required for producing one product D is 1.5 hrs

Number of products to be produced is 530 units

Number of Hours required 530*1.5 i.e 795 hours

Contribution margin per hour from product D is $10 ( (38-23)/1.5)

Contribution margin per hour from product A is $20.5

Opprtunity cost per hour is $20.5-$10 = $10.5

Total number of hours using for producing product D is 795

Total opportunity cost is 795*10.5 i.e $8348 (Rounded off)

Conclusion

Maximum amount that firm can pay is $ 39,770

Total Opportunity cost is $8348 (rounded off to two decimals)