Gunther Company Ltd. produces two types of machinery parts, W and G, both of whi
ID: 2564378 • Letter: G
Question
Gunther Company Ltd. produces two types of machinery parts, W and G, both of which require the same raw material in their respective production processes. The following are the budgeted standard unit contribution margins for the two parts for the next production period of April I to June 30: Part W Part G $72 $32 $96 $16 Selling price Raw materials @$16/kg. Labour @ $5/hr Variable overhead @ $7/labour hr. Total variable costs Unit contribution margin $44 $28 21 $52 $44 Mr. Gunther, the owner of the company, feels that only 1,500 kg. of raw material will be available for the next production period. He knows that the labour union will allow the Gunther Company's employees to work a total of 3,000 hours on these two processes during a three month production period before overtime rates must be paid. Also, Mr. Gunther has promised to produce and deliver 100 units of part G to one of its major customers by June 30 Mr. Gunther has asked the company accountant to find the optimum production mix for the next production period given the material and part G production constraints. Overtime is to be avoided. The results calculated by the accountant, using linear programming techniques, are as follows: tin ns LuC Total Contribution Part G and Material Material and Labour Part W and Labour Part W and Part G 700 W,100 G 900 G 0W, 1,000 G oW, 100 G $24,000 48,000 44,000 4,000 300 W, Based on this analysis, the accountant has advised Mr. Gunther to produce 300 units of part W and 900 units of part G during the April 1 to June 30 production period. REQUIRED a) Assuming that the accountant's calculations are correct and that the labour union's prescribed overtime premium is $3 per hour, determine the marginal value of an additional labour hour. Is overtime advisable? Explain. b) The actual results for the April 1 to June 20 production period were as follows: Units produced Unit contribution margin Part W Part G 960 $23 $39 280 Calculate the contribution margin variances in as much detail as the data permit.Explanation / Answer
Machinary Parts Part W Part G Selling Price $72 $96 Raw Material @16/Kg $32 $16 RM - Kg 2 1 Labour @ $5/Hr $5 $15 Hrs 1 3 Variable O/H $7 $21 Total Variable Cost $44 $52 Unit Contribution Margin $28 $44 Next Production Period April to Jun Months 3 RM Available 1500 kg Labour Hrs Regular 3000 Over Time $3 per hr above 3000 hrs Minimum Production 100 Part G a) Particulars Part W Part G Qty 300 900 Input Required RM Kg per Unit 2 1 RM 600 900 Labour Hrs per Unit 1 3 Total Labour Hours 300 2700 Sale $21,600 $86,400 Input Cost Raw Material $9,600 $14,400 Labour $1,500 $13,500 Variable OverHeads $2,100 $18,900 Total Variable Cost $13,200 $46,800 Contribution Margin $8,400 $39,600 Marginal product of labor represents the increased volume of goods produced by each added unit of labor. Marginal value of labor is simply the marginal product of labor multiplied by the value of the items produced With Each additional Labout Hour 1 Unit of Part W and with additional 3 labour Hrs 1 unit of Part G can be produced. Over Time is not necessary as with 1500 KG of RM available the above product mix can be produced well with Labour Hors limit of 3000 hours. Marginal Value of Labour Part W Part G Out Put 1 1 Sale Price $72 $96 Value of Product $72 $96 Hrs 1 3 Over Time @$3 $3 $9 Net Value $69 $87 Other Variable Cost $44 $52 Contribution Margin $25 $35 Contribution Margin per Hr $25 $12 b) Particulars Part W Part G Qty 280 960 1240 Input Required RM Kg per Unit 2 1 RM 560 960 1520 Labour Hrs per Unit 1 3 Total Labour Hours 280 2880 3160 Sale $20,160 $92,160 Input Cost Raw Material $8,960 $15,360 Labour $1,400 $14,400 Labour OT Variable OverHeads $1,960 $20,160 Total Variable Cost $12,320 $49,920 Contribution Margin $7,840 $42,240 Unit Contribution Margin $28 $44 Actual Unit Contribution Margin $23 $39 Variance ($5) ($5) From the above it appears that Labour Hours per unit estimate has gobe up by 1 hour per unit in each case. Due to this change in estimate, Contribution Margin has decreaed. Particulars 1 1 Qty 280 960 Input Required RM Kg per Unit 2 1 RM 560 960 Labour Hrs per Unit 2 4 Total Labour Hours 560 3840 Sale $20,160 $92,160 Input Cost Raw Material $8,960 $15,360 Labour $2,800 $19,200 Labour OT Variable OverHeads $1,960 $20,160 Total Variable Cost $13,720 $54,720 Contribution Margin $6,440 $37,440 Unit Contribution Margin $23 $39 Actual Unit Contribution Margin $23 $39 Variance $0 $0
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