Edgerron Company is able to produce two products, G and B, with the same machine
ID: 2583667 • 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 $7,500 additional fixed costs 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
Product G
Product B
Total
Contribution Margin per unit
$75.00
$60.00
Machine hours per unit
0.4
1.0
Contribution margin per machine hour
$187.50
$60.00
Maximum number of units sold
500
250
Hours required to produce maximum units
200
250
450
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
Total
Hours dedicated to the production of each product
Units produced for most profitable sales mix
Contribution margin per unit
Total contribution margin - one shift
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
Units produced for most profitable sales mix
Contribution margin per unit
Total contribution margin - two shifts
4. Suppose that the company determines that it can increase Product G’s maximum sales to 600 units per month by spending $6,500 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
Units produced for most profitable sales mix
Contribution margin per unit
Total contribution margin - two shifts and marketing campaign
Product G Product B Selling price per unit $ 120 $ 150 Variable costs per unit 45 90 Contribution margin per unit $ 75 $ 60 Machine hours to produce 1 unit 0.4 hours 1.0 hours Maximum unit sales per month 500 units 250 unitsExplanation / Answer
The total machine hours available in a month would be 22 days x 8 hours = 176 hours. Since the contribution margin per machine hour is higher for product G, the demand for product G should be fulfilled first so as to maximize the contribution generated. There are no hours left for product B.
The total machine hours available in a month working two shifts would be 22 days x 8 hours x 2 = 352 hours. Since the contribution margin per machine hour is higher for product G, the demand for product G should be fulfilled first so as to maximize the total contribution generated and balance hours should be utilized for product B.
The incremental contribution of two shifts and marketing campaign vis-à-vis two shifts is $5100 ($51720 - $46620). However, the incremental costs of the marketing campaign are $6500 which are much higher than the incremental contribution and hence the company should not pursue this strategy.
1 Product G Product B Total Contribution margin per unit 75 60 Machine hours per unit 0.4 1.0 Contribution margin per machine hour 187.5 60.0 Maximum number of units to be sold 500 250 Hours required to produce maximum units 200 250 450 2 Product G Product B Total Hours dedicated to the production of each product (22 x 8) 176 0 176 Units produced for most profitable sales mix (176 / 0.4) 440 0 Contribution margin per unit 75 60 Total contribution margin - one shift 33000 0 33000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.