Problem P7-8 Additional Processing Decision with a Production Constraint Mega Ch

Question

Problem P7-8 Additional Processing Decision with a Production Constraint

Mega Chemical Company produces ZylexA and a related product called ZylexB. ZylexB, which sells for $17.00 per gallon, is made from a base of ZylexA plus additional ingredients. It takes 25 minutes to manufacture a gallon of ZylexA and an additional 10 minutes to manufacture a gallon of ZylexB. ZylexA sells for $11.00 per gallon. The cost per gallon of manufacturing ZylexA and the additional costs to convert it to ZylexB are:

ZylexA Additional Cost of ZylexB Material $2.00 $1.75 Labor 2.50 0.50 Variable overhead 2.25 1.10

Explanation / Answer

ZylexA Selling price 11 Less: Material 2 Labor 2.5 Variable overhead 2.25 6.75 Contribution margin 4.25 production time per unit 25 Contribution margin per unit per minute 0.17 ZylexB Incremental revenue 6 Less: Incremental Material Cost 1.75 Incremental Labor Cost 0.5 Incremental Variable overhead 1.1 3.35 Incremental profit (loss) 2.65 Incremental production time per unit 10 Incremental profit per minute 0.265 Narrative answer: Zylex B product makes the largest contribution to company profit, given a capacity constraint measured in terms of production time

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