Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month Product G $ 60 15 $ 45 Product B $ 90 54 $36 1.0 hours 200 units 0.4 hours 600 units The company presently operates the machine for a single eight-hour shift for 22 working days each month Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month This change would require $4,500 additional fixed costs per month, (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.) 1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit $ 45.00 $ 36.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour Product G Product B Total < Prev 4 of 9 Next > ING 12 5/2 to search

Answer 1

1. Determine the contribution margin per machine hour that each product generates.

.

.	Product G	Product B
Contribution margin per unit	$45.00	$36.00
Machine hours per unit	0.4	1.0
Contribution margin per machine hour	$112.5	$36.00
	Product G	Product B	Total
Maximum number of units to be sold	600	200	..
Hours required to produce maximum units	(600*0.4) 240	200 (200*1)	440

.

2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month?

.

**Here the one month the available hours are 22 * 8 = 176 hours, the maximum contribution margin per machine hour will get from from Product G, so produce maximum units that can sell, Maximum number of units to be sold 600 units, need 240 hours to produce this units. However the machine hour is constrained, so only available in a month was 176 hour, there for utilize this full hours to produce the product G to get maximum profit. So we can produce 440 units ( 176 / 0.4 = 440) from 176 hours and 0 units product b

.

	Product G	Product B	Total
Hours dedicated to the production of each product	176		176
Units produced for most profitable sales mix	440		.
Contribution margin per unit	$45.00		.
Total contribution margin - one shift	$19800		176

.

3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month?

.

**then total hour available = 176 * 2 shift = 352 hours

First priority to give product G, because we get maximum contribution per machine hour, here the machine hour is constrained factor

*We can sell maximum product of G 600 units, need machine hour = 600 * 0.4 = 240 hours

*Any hours remain produce the Product B,

So remaining hours = 352 - 240 = 112 hours, using this hours we can produce maximum units of Product B = 112 hours multiply with hour required to per units of 1 hour

112 * 1 = 112

.

	Product G	Product B	Total
Hours dedicated to the production of each product	240	112	352
Units produced for most profitable sales mix	600	112	.
Contribution margin per unit	$45.00	$36.00
Total contribution margin - two shifts	$27000	$4032	$31032
Total contribution margin - one shift	.		19800
Change in contribution margin			11232
Change in fixed costs	.	.	4500
Change in operating income(loss)	.		$6732
Should the company add another shift?	Yes		.

.

4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $3500 per month in marketing efforts. Should the company pursue this strategy and the double shift?

.

Now the company can sell the product G 700 units, so needed hours = 700 * 0.4 = 280 hours

Remaining hour of 352 - 280 = 72 can be used for producing product b of 72 units (72 * 1 )

So the maximum profit mix = 700 units of Product G and 72 units of Product B

.

.	Product G	Product B	Total
Hours dedicated to the production of each product	280	72	352
Units produced for most profitable sales mix	700	72	.
Contribution margin per unit	$45.00	$36.00
Total contribution margin - two shifts and marketing campaign	$31500	$2592	$34092
Contribution margin - two shifts without marketing campaign	.	.	$31032
Change in contribution margin	.	.	3060
Additional marketing costs	.	.	3500
Change in fixed costs	.	.	4500
Change in operating income(loss)	.	.	$(4940)
Should the company pursue the marketing campaign?	No