Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow.
Basic | Classic | Formal | ||||||||
Sales price | $ | 32 | $ | 80 | $ | 195 | ||||
Maximum annual demand (units) | 19,000 | 12,000 | 29,000 | |||||||
Input requirement per unit | ||||||||||
Direct material | 0.5 | yards | 0.3 | yards | 0.6 | yards | ||||
Direct labor | 0.9 | hours | 3 | hours | 8 | hours | ||||
Costs | |||
Variable costs | |||
Materials | $ | 19 | per yard |
Direct labor | $ | 15 | per hour |
Factory overhead | $ | 3 | per direct labor-hour |
Marketing | 10 | % of sales price | |
Annual fixed costs | |||
Manufacturing | $ | 51,000 | |
Marketing | $ | 8,000 | |
Administration | $ | 45,000 | |
The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 49,500 direct labor-hours per year caused by the plant layout.
Required:
a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below
a-2. How much operating profit could the company earn if it were able to satisfy the annual demand?
b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor.
b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?
c. Given the information in the problem so far, what product mix do you recommend?
d-1. Calculate the contribution margin for each type of dress shirt using the table below.
d-2. How much operating profit should your recommended product mix generate?
e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 17,500 more hours. The direct labor cost would increase from $15 to $18 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?
a-1
Basic | Classic | Formal | |
Sales Price | $ 32.00 | $ 80.00 | $ 195.00 |
Variable Costs | |||
Material | $ 9.50 | $ 5.70 | $ 11.40 |
Direct Labor | $ 13.50 | $ 45.00 | $ 120.00 |
Factory Overhead | $ 2.70 | $ 9.00 | $ 24.00 |
Marketing | $ 3.20 | $ 8.00 | $ 19.50 |
Total Variable Costs | $ 28.90 | $ 67.70 | $ 174.90 |
Contribution Margin per unit | $ 3.10 | $ 12.30 | $ 20.10 |
Units | 19000 | 12000 | 29000 |
Total Contribution Margin | $ 58,900 | $ 147,600 | $ 582,900 |
a-2 Operating Profit = Contribution Margin - Fixed Costs
= $789400 - 104000 = $685400
b-1
Basic | Classic | Formal | |
Contribution Margin per unit | $ 3.10 | $ 12.30 | $ 20.10 |
Direct Labor hours per unit | 0.9 | 3 | 8 |
Contribution Margin per hour | $ 3.44 | $ 4.10 | $ 2.51 |
b-2 Classic product lines makes most profitable use of constrained resource.
c. Basic and Classic
Basic | Classic | Formal | |
Direct Labor hours per unit | 0.8 | 3 | 8 |
Units | 19000 | 12000 | 29000 |
Direct Labor hours required | 15200 | 36000 | 232000 |
Direct Labor hours used | 13500 | 36000 | 0 |
Units production | 16875 | 12000 | 0 |
d-1
Basic | Classic | |
Sales Price | $ 540,000 | $ 960,000 |
Variable Costs | ||
Material | $ 160,313 | $ 68,400 |
Direct Labor | $ 227,813 | $ 540,000 |
Factory Overhead | $ 45,563 | $ 108,000 |
Marketing | $ 54,000 | $ 96,000 |
Total Variable Costs | $ 487,689 | $ 812,400 |
Contribution Margin | $ 52,311 | $ 147,600 |
d-2 Operating Profit = Contribution Margin - Fixed Costs
= $199911 - 104000 = $95911
e. Increase in Direct Labor cost = $18 - 15 = $3 per hour
Since Basic has contribution margin per hour higher than $3, so additional units for basic should only be produced.
Austin should manufacture 2125 additonal units of Basic.
Additional Profit = 2125 x (3.10 - 2.70) = $850
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