Question

Ocean Inc manufactures picture frames from driftwood in two sizes, small and large. Market demand for the small frames is 1200 units per month and demand for the large frames is 200 units per month. Fixed costs for the business per week: $2000.                  

Ocean Inc is located in a remote small town in Nova Scotia, therefore finding qualified workers is challenging. Currently, Ocean employs two full time frame-makers. Each employee manufactures frames for a maximum of 40 hours per week. There are no other potential employees available for hire.

Determine the optimal product mix (number of units per week) to maximize Ocean Inc’s profit.

                                                                                                                         Small Frame                 Large Frame

        Units produced per hour per employee 4                                    1

        Selling Price $32                                $175

        Direct Materials per unit $10                                $60

        Direct Labour + variable MOH per unit $5.50                            $50

a) What constraints must Ocean Inc consider when deciding on product mix?

2. Determine the optimal product mix, in units, to be manufactured per week. Show all work.
3. Determine the operating profit for one week using the optimal product mix.

Answer 1

1 Solution : 3 a) Constraints Ocean Inc must consider whendeciding on product mix :- 4 Since the Ocean Inc is located in a remote small town in Nova Scotia, therefore finding qualified workers is 5 challenging. Currently, Ocean employs two full time frame-makers. Therefore, Here Direct labor is the key Factor, 6 thereore Optimal product Mix is based on Contribution Per direct Labour Hour. 8 Also, Demand for Small Frames and Large Frames are: 10 Monthly 11 Weekly ( 4 Weeks in a Month) Small Frame 1200 Units 300 Units Large Frame 200 Units 50 Units 14 b) Calculation of Optimal Product Mix to maximize its profits :- 15 Since the company is limited to 80 labour hours( 40Hours * 2 Employees) per month. Therfore Labour hours is a Limited Resource, 16 so we have to calculate Contribution per labour hours to find out which product should be produced first 17 and how much quantity of that product should be produced :- Small Frame Large Frame 19 Contribution Per labour Hour (Key Factor) 20 Particulars 21 Sales Price Per Unit (a) 22 Less Direct Materials per unit (b) 23 Less Direct Labour + variable MOH per unit (C) 24 Contibution Per Unit (d = a-b-c) 25 Required No. of Labour Hours per unit(e) 26 Contribution Per labour Hour (d/e) 32.00 10.00 5.50 16.50 0.25 66.00 175.00 60.00 50.00 65.00 1.00 65.00

SU 31 Since Contibution per labour hour is higher in case of Small Frames , Therefore Company should produce 32 Small Frames first, then Large Frames. 34 Total Labour Hours 80 Hours 36 Particulars 37 Small Frame Expected Demand 300 Units Labour Hours Reg per Total Labour Hours 0.25 Hours 75 Hours (300 * 0.25 Hours) Remaining Labour Hours 5 Hours (80 Hrs - 75 Hrs) 40 Large Frame 5 Hours 5 Units (B/F) 1.00 Hour ( 5 Hours / 1 Hr per unit) 5 Hours (Remaining Hours) 15 No. of Units Company should produce : 46 Product 47 Small Frame 48 Large Frame Units Produced 300 Units 5 Units

57 58 (c) Calculation of operating profit per week using the optimal product mix : 59 Particulars Small Frame 60 Contibution Per Unit (A) 61 No. of Units Produced (B) 300 Units 62 Total Contibution (A*B) $4,950 16.5 Large Frame 65 5 Units $325 64 Total Contribution ($ 4950 +$ 325) 65 Less : Fixed Costs 66 Operating Profit $5,275 $2,000 $3,275 67 68