Bittern Corporation manufactures four different products. It has decided to do a
ID: 2510918 • Letter: B
Question
Bittern Corporation manufactures four different products. It has decided to do a profitability analysis to see which of the products it should produce based upon their relative profitability. The company has the constraint of only 100,000 machine hours available per month for production. Information about the four products is provided below. BITTERN CORPORATION SALES AND PRODUCTION DATA FOR VARIOUS PRODUCTS J-20 K-25 L-30 ?-35 Selling Price Per Unit Variable Costs Per Unit: S 30.0025.00 S50.00 S 70.00 Manufacturing Selling and Administrative 6.00 7.50 20.00 5.00 14.00 7.50 7.50 24.50 Fixed Costs Per Unit: Manufacturing Selling and Administrative 8.00 2.00 0.4 100,000 5.00 1.00 0.25 150,000 9.00 2.00 0.8 80,000 12.00 4.00 1.0 60,000 Machine Hours Per Unit Required Monthly Demand in Units REQUIRED: (I) Prepare an analysis to show in which order the products should be produced based on the company's production constraints and each product's relative profitability Based on the analysis performed in (1) above, indicate how many units of cach product should be produced in order to maximize the company's profit. (2)Explanation / Answer
Solution:
Part 1 ---
The question is related to the Constraints (Key or Limiting factor) in availability of production resources.
Key or Limiting Factor or Constraints
Here are some examples of Key Factor:
In such a case, a decision has to be taken regarding the choice of the product whose production is to be increased, reduced or stopped.
In case of Limiting Factor, selection of product is based on Contribution Margin per unit of constraints. Select the product which has highest contribution per unit.
Here, the constraints or limiting factor is Machine Hours. So, we need to calculate the Contribution Margin per unit of machine hour and then priorities the order in which products should be produced.
Calculation of Contribution Margin Per Unit
J-20
K-25
L-30
M-35
Selling Price Per Unit
$30.00
$25.00
$50.00
$70.00
Variable Cost Per Unit
Manufacturing
$6.00
$7.50
$20.00
$14.00
Selling and Administrative
$7.50
$7.50
$5.00
$24.50
Total Variable Cost per unit
$13.50
$15.00
$25.00
$38.50
Contribution Margin Per Unit
(Selling Price - Total Variable Cost per unit)
$16.50
$10.00
$25.00
$31.50
Required Machine Hours per unit
0.4
0.25
0.8
1
Contribution Margin per unit per machine hour
(CM Per Unit / Required MH per unit)
$41.25
$40.00
$31.25
$31.50
Ranking for production
I
II
IV
III
Order to produce the product
1st Priority – J-20
2nd Priority – K-25
3rd Priority – M-35
4rth Priority – L-30
Part 2
Ranking
Product
Monthly Demand in Units
Required Machine Hour Per Unit
Total Machine Hours Required (A*B)
Optimum Product Mix in order to Maximize Profit (Units)
(A)
(B)
(A*B)
1
J-20
100000
0.4
40000
40,000
2
K-25
150000
0.25
37500
37,500
3
M-35
60000
1
60000
22,500
4
L-30
80000
0.8
64000
0
Total Available Machine Hours 100,000 MHs
Number of Units of each product should be produced in order to maximize the company’s profit as follows:
Product J-20 = 40,000 Units
Product K-25 = 37,500 Units
Product M-35 = 22,500 Units
Product L-30 = 0 Units
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
Calculation of Contribution Margin Per Unit
J-20
K-25
L-30
M-35
Selling Price Per Unit
$30.00
$25.00
$50.00
$70.00
Variable Cost Per Unit
Manufacturing
$6.00
$7.50
$20.00
$14.00
Selling and Administrative
$7.50
$7.50
$5.00
$24.50
Total Variable Cost per unit
$13.50
$15.00
$25.00
$38.50
Contribution Margin Per Unit
(Selling Price - Total Variable Cost per unit)
$16.50
$10.00
$25.00
$31.50
Required Machine Hours per unit
0.4
0.25
0.8
1
Contribution Margin per unit per machine hour
(CM Per Unit / Required MH per unit)
$41.25
$40.00
$31.25
$31.50
Ranking for production
I
II
IV
III
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