Management at Generic Chemical Company is evaluating its product mix in an attem

Question

Management at Generic Chemical Company is evaluating its product mix in an attempt to maximize profits. For the past 2 years, Generic has produced 4 products and all have large markets in which to expand market share. Heinz Bexer, Generic’s controller, has gathered data from current operations and wants you to analyze them for him. Sales and operating data are as follows:
Product Product Product Product
AZ1 BY7 CX5 DW9
Variable production cost $71,000 $91,000 $91,920 $97,440
Variable selling costs $10,200 $5,400 $12,480 $30,160
Fixed production costs $20,400 $21,600 $29,120 $18,480
Fixed administrative costs $3,400 $5,400 $6,240 $10,080
Total sales $122,000 $136,000 $156,400 $161,200
Units produced and sold $85,000 $45,000 $26,000 $14,000
Machine hours used $17,000 $18,000 $20,800 $16,800
Generic’s scarce resource, machine hours, is being used to full capacity.
Required
1. Compute the machine hours needed to produce one unit of each product
2. Determine the contribution margin per machine hour for each product
3. Which product line(s) should be targeted for market share expansion?

Explanation / Answer

1.machine hours/units produced = machines hours to produce one unit A 17,000/85,000=.2 B 18,000/45,000=.4 C 20,800/26,000=.8 D 16,800/14,000=1.2 2. (sales-variable costs)/machine hours = contribution margin per machine hour A (122,000 - (71,000+10,200))/17,000=$2.40 B (136,000 - (91,000+ 5,400))/18,000=$2.20 C (156,400 - (91,920+12,480))/20,800=$2.50 D (161,200 - (97,440+30,160))/16,800=$2.00 3. The product with the highest contribution margin per machine hour: C.

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