Question

AA Inc manufactures hoodies in two sizes: child and adult. The AA Inc factory has excess capacity available, however the specially trained sewers labour force is limited; the company has a maximum of 18,000 direct labour sewing hours per year for manufacturing. Fixed costs are stable and unavoidable, at $300,000.

Per Unit Data:

                                                                           Child’s Hoodie                                     Adult Hoodie

               SALES PRICE                                    $ 40                                                                   $ 55

               Variable Manufacturing Cost     $ 18                                                                   $ 23

              

               DL hours needed                           0.5 DL hours per unit                                   0.8 DL hours per unit

1. What is the constraining factor for AA Inc for hoodie manufacturing?
2. Use the data above to determine which hoodie size product should be emphasized.
3. If the company raised the price of the adult sized hoodie to $60 (variable costs per unit stay the same) would this price increase change your decision re Part B, which product to emphasize?
4. Name two qualitative considerations that would be part of the product size emphasis decision. Focus on your answer to Part B in your comments.
5. Assuming that the adult-sized hoodie is sold for $55, there is a maximum of 18,000 sewing hours, and assume also that the market demand is limited to 30,000 units of each size. Determine the optimal product mix and calculate the operating profit at this product mix.

Answer 1

A. In the given question the constraint factor is sewing hours since the maximum of 18000 hours are available. Assuming the demand is unlimited and the sewing hours are constraint factor the company has to invest the sewing hours efficiently in the profitable product

B.

		Child Hoodie	Adult Hoodie
B	Particulars	40	55
a	Variable Manufacturing cost	18	23
b	Total Contribution per unit	22	32
c	Sewing hour required	0.5	0.8
d	Total Contribution per sewing hour (c/d)	44	40
	Rank	1	2

The company should emphasize the product product child hoodie since contribution per hour of constraint factor is higher than adult hoodie and hence it is profitable

		Child Hoodie	Adult Hoodie
C	Particulars	40	60
a	Variable Manufacturing cost	18	23
b	Total Contribution per unit	22	37
c	Sewing hour required	0.5	0.8
d	Total Contribution per sewing hour (c/d)	44	46.25
	Rank	2	1

If the company increase the hoodie size to 60 then the decision changes to Adult hoodie as contribution per hour of constraint factor has increased

D. The product size to be manufactured decision depends on that product which gives higher contribution per unit in part b the adult size has given hence the decision is to manufacture the adult. If there is no constraint also, we need to manufacture adult hoodie since contribution per unit is giving more by adult hoodie

E.

		Child Hoodie	Adult Hoodie
E	Particulars	40	55
a	Variable Manufacturing cost	18	23
b	Total Contribution per unit	22	32
c	Sewing hour required	0.5	0.8
d	Total Contribution per sewing hour (c/d)	44	40
	Rank	1	2
e	No of hours available	18000
f	No of units demand	30000	30000
	Child hoodie production hours required (30000*0.5hr)	15000
	Balance hours	3000
	No of Adult hoodie that can be produced in available 3000 hours =(3000/0.8		3750
	Units produced	30000	3750