Edgerron Company is able to produce two products, G and B, with the same machine
ID: 2572035 • 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 $13,500 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 –
1) Contribution Margin Per Unit
Product G
Product B
Contribution Margin per unit (A)
$135
$108
Machine Hours to produce 1 unit (B)
0.40
1.00
Contribution margin per machine hour (A/B)
$337.50
$270.00
Product G
Product B
Total
Maximum number of units to be sold (M)
650
250
Hours required to produce maximum units (M x B)
260
250
510
Part 2 –
Here the Machine Hours are the limiting factor. It means the machine hours are under scarcity and the company has highest Contribution Margin per machine hour for Product G. Hence company will make Product G first and then if any machine hours left the company will make the product which provide second highest contribution margin per machine hour i.e. Product B.
Part 2)
Product G
Product B
Total
Hours dedicated to the production of each product (22 days x 8)
176 Hours
0
Units produced for most profitable sales mix
440
(176 / 0.4 per unit)
0
Contribution Margin per unit
$135
0
Total contribution margin -one shift
$59,400
0
$59,400
Part 3 ---
By adding another shift the total available machine hours = 22 days x 8 days x 2 shift = 352 Machine Hours
Part 3)
Product G
Product B
Total
Hours dedicated to the production of each product
260 Hours
92 Hours
352 Hours
Units produced for most profitable sales mix
650
92
(92 Hours / 1 hour per unit)
Contribution Margin per unit
$135
$108
Total contribution margin - two shift
$87,750
$9,936
$97,686
Part 4 –
Part 4)
Product G
Product B
Total
Hours dedicated to the production of each product
280 Hours
(700 Units x 0.4 Hours per unit)
72 Hours
352 Hours
Units produced for most profitable sales mix
700
72
Contribution Margin per unit
$135
$108
Total contribution margin - two shift
$94,500
$7,776
$102,276
Note – Total Contribution margin in two shift is higher than the cost spend on marketing efforts. Hence the company should pursue this strategy and the double shift.
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
1) Contribution Margin Per Unit
Product G
Product B
Contribution Margin per unit (A)
$135
$108
Machine Hours to produce 1 unit (B)
0.40
1.00
Contribution margin per machine hour (A/B)
$337.50
$270.00
Product G
Product B
Total
Maximum number of units to be sold (M)
650
250
Hours required to produce maximum units (M x B)
260
250
510
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