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.

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 $140 Product B $ 170 102 Contribution margin per unit $ 85 $ 68 Machine hours to produce 1 unit Maximum unit sales per month 0.4 hours 500 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 $8,500 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 1:

Solution 2:

If company operated in only one shift then available machine hours per month = 22*8 = 176 hours

As contribution per machine hours of product g is greater than product B, therefore available machine hours up to 200 will be first dedicated to Product G. Therefore in this scenario, company will product Product G only. contribution statment is as under:

Solution 3:

If company operated in two shift then available machine hours per month = 22*8*2 = 352 hours

As contribution per machine hours of product g is greater than product B, therefore available machine hours up to 200 will be first dedicated to Product G and remaining 152 hours will be allocated to Product B. contribution statment is as under:

Solution 4:

If sale of product G is increased to 600 units per month then available machine hours up to 240 (600*0.4) will be first dedicated to Product G and remaining 112 hours will be allocated to Product B. contribution statment is as under:

As there is reduction in contribution by $1.720, therefore company should not pursue this strategy.

Particulars Product G Product B Total Contribution margin per unit $85.00 $68.00 Machine hour per unit 0.4 1 Contribution per machine hours $212.50 $68.00 Maximum number of units to be sold 500 200 Hours required to produce maximum units 200 200 400

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