Edgerron Company is able to produce two products. G and B. with the same machine
ID: 2481572 • 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 cay for 22 Cays per month. The change would require $12,000 additional fixed ousts per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any. as negative values.) Determine the contribution margin per machine hour that each product generates. Suppose that the company determines that it can increase Product G's maximum sates to 700 units per month by spending $11000 per month in marketing efforts. Should the company pursue this strategy and the double shift?Explanation / Answer
Product G
Product B
Contribution margin per unit
$120.00
$96.00
Machine hours per unit
0.4
1.0
Contribution margin per machine hour
+120/.4= $300
$96.00
Product G
Product B
Maximum number of units to be sold
650
250
Hours required to produce maximum units
+650*.04= 260
250
2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month?
Product G
Product B
Hours dedicated to the production of each product
176
Units produced for most profitable sales mix
440
Contribution margin per unit
$120.00
Total contribution margin - one shift
$52,800
3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month?
Product G
Product B
Total
Hours dedicated to the production of each product
260
92
352
Units produced for most profitable sales mix
650
92
Contribution margin per unit
$120.00
$96.00
Total contribution margin - two shifts
$78,000
$8,832
$86,832
Total contribution margin - one shift
52,800
Change in contribution margin
34,032
Change in fixed costs
12,000
Change in operating income
$22,032
Should the company add another shift?
Yes
4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $12000 per month in marketing efforts. Should the company pursue this strategy and the double shift?
Product G
Product B
Total
Hours dedicated to the production of each product
280
72
352
Units produced for most profitable sales mix
700
72
Contribution margin per unit
$120.00
$96.00
Total contribution margin - two shifts and marketing campaign
$84,000
$6,912
$90,912
Contribution margin - two shifts without marketing campaign
86,832
Change in contribution margin
4,080
Additional marketing costs
12,000
Change in fixed costs
12,000
Change in operating income
$(19,920)
Should the company pursue the marketing campaign?
No
Should the company add another shift?
Yes
4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $12000 per month in marketing efforts. Should the company pursue this strategy and the double shift?
Product G
Product B
Total
Hours dedicated to the production of each product
280
72
352
Units produced for most profitable sales mix
700
72
Contribution margin per unit
$120.00
$96.00
Total contribution margin - two shifts and marketing campaign
$84,000
$6,912
$90,912
Contribution margin - two shifts without marketing campaign
86,832
Change in contribution margin
4,080
Additional marketing costs
12,000
Change in fixed costs
12,000
Change in operating income
$(19,920)
Should the company pursue the marketing campaign?
No
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