Question

# 42

Chef Gourmet, Inc., has assembled the following data pertaining to its two most popular products.

	Blender			Food Processor
Direct material	$	24		$	41
Direct labor		18			31
Manufacturing overhead @ $50 per machine hour		50			100
Cost if purchased from an outside supplier		66			114
Annual demand (units)		26,000			30,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $36. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1.	If 51,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?

	Blender	Food Procesor
Manufacture
Purchase

       

2.	With all other things constant, if management is able to reduce the direct material for a food processor to $24 per unit, how many units of each product should be manufactured? Purchased?

       

	Blender	Food Processor
Manufacture
Purchase

Answer 1

1.

Machining hours required for Blender

= Total manufacturing over head/Manufacturing overhead rate per machine hour

= $ 50/$ 50 = 1 hour

Machining hours required for Food Processor

= Total manufacturing over head/Manufacturing overhead rate per machine hour

= $ 100/$ 50 = 2 hours

Fixed manufacturing cost for Blender = Fixed manufacturing overhead rate x No. of hours

                                                                   = $ 36 x 1 = $ 36

Fixed manufacturing cost for Food Processor = Fixed manufacturing overhead rate x No. of hours

                                                                  = $ 36 x 2 = $ 72

       Computation of additional amount required on outsourcing:

	Blender	Food Processor
Direct material	$                      24	$                              41
Add: Direct labor	$                     18	$                              31
Add: Total manufacturing overhead	$                       50	$                            100
Total unit cost for manufacturing	$                       92	$                            172
Less: Fixed manufacturing overhead	$                      36	$                              72
Total variable cost for manufacturing	$                      56	$                            100
Purchasing cost	$                       66	$                            114
Additional amount spend on purchasing	$                      10	$                              14

Since the additional amount on purchasing Food Processor is more than that of Blender, Priority should be given to manufacturing of Food Processor.

Hence available 51,000 MH is used to manufacture Food Processor.

No. of Food Processor manufactured = $ 51,000/2 = 25,500 nos.

No. of Food Processor purchased = 30,000 - 25,500 = 4,500 nos.

No. of Blender purchased = 26,000 nos.

Answer:

	Blender	Food Processor
Manufacture	0	25,500
Purchase	26,000	4,500

2.

Reducing direct material expenses will not affect the decision because additional amount spend on purchasing for Food Processor will increase in that case.

	Blender	Food Processor
Direct material	$                                 24	$                               24
Add: Direct labor	$                                 18	$                               31
Add: Manufacturing overhead	$                                 50	$                            100
Total unit cost for manufacturing	$                                 92	$                            155
Less: Fixed cost	$                                 36	$                               72
Total variable cost	$                                 56	$                               83
Purchasing cost	$                                 66	$                            114
Excess amount spend on purchasing	$                                 10	$                               31

Answer:

	Blender	Food Processor
Manufacture	0	25,500
Purchase	26,000	4,500