Edgerron Company is able to produce two products, G and B, with the same machine

Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available Selling price per unit Variable costs per unit Product G $170 70 Product B $200 120 Contribution margin per unit $100 80 Machine hours to produce 1 unit Maximum unit sales per month 0.4 hours 550 units 1.0 hours 200 units 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 $10,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Explanation / Answer

1 Product G Product B Total a) Given, Contribution margin per unit $100 $80 b) Number of Machine hours per unit 0.4 Hours 1 hour c)=a/b Contribution margin per machine hour 250 per machine hour 80 per machine hour maximum number of units to be sold 550 200 750 Hours required to produce maximim units 220 hours 200 hours 420 Hours (550*0.4) (200*1) 2 If the company operates with only one shift, Company should produce that product whose contribution is more and labour hour consumption is relatively less (Since labour hours is a constaint) Hours available per month per shift= 22days*8hours=176 Hours Total hours required is 420 hours Most profitable sales mix: Since Product G generates more contribution per unit($100) and more contributon per machine hour($250), it is preferrable to produce Product G with the given labour hours hours Dedicated to the production of each product 176 Hours - 176 Hours Units produced per for most profitable sales mix=176/0.4= 440 units - Contribution margin per unit $100 - Total contribution margin per one shift= 440*$100 $44,000 $44,000 3 If company adds one more shift then total available hours will be: 16 hours*22days=352 Hours Profitable mix: 1st allocated hours required to Product G and balance if any remaining to Product B hours Dedicated to the production of each product 220 Hours 132 Hours 352 Hours (352-220) Units produced per for most profitable sales mix 550 units 132 units 682 units (220/0.4) (132/1) Contribution margin per unit $100 $80 Total contribution margin -two shifts $55,000 $10,560 $65,560 less: Additional fixed costs: ($10,000) Net contribution per two shifts: $55,560 4 Sales of product G increases to 600 units, if extra $9000 per month is incurred In double shift , hours available= 352 Hours required if 600 units of product G is sold= 600*0.4=240 Hours Profitable mix: 1st allocated hours required to Product G and balance if any remaining to Product B hours Dedicated to the production of each product 240 Hours 112 Hours 352 Hours (352-240) Units produced per for most profitable sales mix 600 units 112 units 712 Hours (240/0.4) (112/1) Contribution margin per unit $100 $80 Total contribution margin -two shifts $60,000 $8,960 $68,960 less: marketing costs ($9,000) Net contribution margin-two shifts $51,000 $8,960 $59,960 Less: Additional Fixed Costs ($10,000) Net contribution per two shifts $49,960

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