Edgerron Company is able to produce two products, G and B, with the same machine
ID: 2437490 • Letter: E
Question
Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.
The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $12,500 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)
Explanation / Answer
Solution:
Part 1 –
Contribution Margin per machine hour
Product G
Product H
Contribution Margin per unit (A(
$125.00
$100.00
Machine Hours to produce 1 unit (B)
0.4 Hours
1 Hours
Contribution Margin per machine hour (A/B)
$312.50
$100.00
Product G
Product H
Total
Maximum number of units to be sold
650
250
Hours required to produce maximum units
260
(650 Units x 0.4 hours needed per unit)
250
(250 Units x 1 hour needed per unit)
510
Part 2 --
Total Available hours in a month under single shift = 22 working days x 8 hours per day = 176 Hours
Here, the total available hours is a limiting factor. So we need to produce that produce which have highest contribution margin per limiting factor. Here the Product G has highest Contribution Margin per Machine Hour, so we will use our all limiting factors to produce Product G to satisfy the demand of this product.
Product G
Product B
Total
Hours dedicated to the production of each product
176 Hours
0
Units produced for most profitable sales mix
440
(176 Hrs / 0.4 hrs needed per unit)
0
Contribution Margin per unit
$125
0
Total contribution margin -one shift
$55,000
0
$55,000
Part 3 --
Total Available Machine Hours under Double Shift = 22 working days x 8 hours x 2 = 352 Hours
Product G
Product B
Total
Hours dedicated to the production of each product
260 Hours
92 Hours
Units produced for most profitable sales mix
650
92
Contribution Margin per unit
$125
$100
Total contribution margin - two shift
$81,250
$9,200
$90,450
Additional Fixed Costs
$12,500
Operating Profit
$77,950
Should the company pursue this strategy and the double shift
YES
Part 4 --
Product G
Product B
Total
Hours dedicated to the production of each product
280 Hours
72 Hours
Units produced for most profitable sales mix
700
72
Contribution Margin per unit
$125
$100
Total contribution margin - two shift
$87,500
$7,200
$94,700
Additional Fixed Costs
$12,500
Fixed Cost in Marketing efforts
$11,500
Total Fixed Costs
$24,000
Operating Profit
$70,700
Should the company pursue this strategy and the double shift
YES
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Contribution Margin per machine hour
Product G
Product H
Contribution Margin per unit (A(
$125.00
$100.00
Machine Hours to produce 1 unit (B)
0.4 Hours
1 Hours
Contribution Margin per machine hour (A/B)
$312.50
$100.00
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