Question

Dweeb Corp. makes three products in a single facility. These products have the following unit product costs:

                                                                     Product A                Product B                    Product C

Direct material                                                $40.00                         $35.00                         $38.00

Direct labor                                                     21.00                         18.50                         17.50

Variable manufacturing overhead                       5.50                             7.00                           11.00

Fixed manufacturing overhead                         35.00                           36.00                         31.00    

Unit cost                                                       $101.50                         $96.50                        $97.50

Additional data concerning these products are listed below:

                                                                     Product A                  Product B            Product C

Mixing minutes per unit                                     5.5                                3.5                      5.0

Selling price per unit                                      $135.00                    $122.00                   128.00

Variable selling cost per unit                             $9.50                        $7.00                    $8.75

Monthly demand in units                               2,400                         4,900                     4,200

The mixing machines are potentially the constraint in the production facility. A total of 39,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

• How many minutes of mixing machine time would be required to satisfy demand for all three products?
  
• What is the contribution margin per minute individually for Products A, B, and C?

• Using only the available 47,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Round down to the nearest whole units.)

• Is there unmet demand for product(s)? If so, how much and for which product(s)?

• Assume there is unmet product demand. How much in total should Dweeb be willing to pay for additional machine time?

• Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

• Is there anything misleading about the figure given for fixed manufacturing overhead?

• What is the significance of contribution margins with respect to determining how much of each product to produce to maximize profit?

• What is the significance of contribution margins with respect to determining how much Dweeb should pay for additional machine time?

• Why isn’t sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?

Answer 1

Q1. How many minutes of mixing machine time would be required to satisfy demand for all three products?

Answer. 51,250 minutes of mixing machine time would be required to satisfy the demand for all three product as computed below.

Required Minutes of mixing machine time = Mixing machine time for Product A + Product B + Product C

= (2,400 units $\times$ 5.5 / min) + (4,900 units $\times$ 3.5 / min) +(4,200 units $\times$ 5/ min)

= 13,200 minutes + 17,150 Minutes + 21,000 minutes

= 51,350 Minutes

Q2. What is the contribution margin per minute individually for Products A, B, and C?

The Contribution margin of individual products are $68.5, $61.5 and $61.5 for respective product calculated as follows.

Computation Contribution Margin

Products	A	B	C
Selling Price	135.00	122.00	128.00
Less: Variable Cost: ( DM + DL+V. MOH)	66.50	60.50	66.50
Contribution Margin	$68.50	$61.50	$61.50
Mixing minutes per unit	5.5	3.5	5
Contribution Margin per minute	$12.45	$17.57	$12.30

Q3. Using only the available 47,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Round down to the nearest whole units.)

Answer. If only 47,000 Minutes are available, the whole of product B- 4,900 units,and product A-2,400 units and only 3,330 units of product C shall be produced to maximize operating profit. This decision is taken on the basis of maximum contribution margin per minute and mixing minutes time is constraint.

=(2,400 units $\times$ 5.5 / min) + (4,900 units $\times$ 3.5 / min) +(3,330 units $\times$ 5/ min)

= (13,200 minutes + 17,150 Minutes) + 16,650 minutes Balance

= 47,000 minutes

4. Is there unmet demand for product(s)? If so, how much and for which product(s)?

Yes, there is unmet demand for product C. It is 870 Units (4,200 - 3,330).

Q5. Assume there is unmet product demand. How much in total should Dweeb be willing to pay for additional machine time?

Dweeb should be willing to pay the contribution amount less variable selling expense per unit for unmet demand that is equal to $45,892.5 ($61.5 - 8.75) 870 units with respect to unmet demand for product C.

Q6. Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

Yes, the variable selling cost of $8.75 figured into calculation no 5 for determining the maximum amount payable for additional machinery required for meeting unmet demand.

Q7. Yes, the Fixed manufacturing Overhead for individual product is misleading. The total fixed manufacturing overhead should have been given .

Q8. What is the significance of contribution margins with respect to determining how much of each product to produce to maximize profit?

Contribution margin plays important role for making decision with respect to which product shall be produce more and vise-versa. Product with maximum contribution margin per unit of key resources is produced more.

Q9. Contribution Margin helps in making decision with respect to recovery of the corporation variable cost of products and balance amount to be paid for acquiring fixed assets.

10. Try to imagine and self answer.