Kitchen Magician, Inc. has assembled the following data pertaining to its two mo

Question

Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products.

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $25. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

If 76,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?

With all other things constant, if management is able to reduce the direct material for an electric mixer to $20 per unit, how many units of each product should be manufactured? Purchased?

Blender Electric Mixer Direct material $ 20 $ 28 Direct labor 13 41 Manufacturing overhead @ $50 per machine hour 50 100 Cost if purchased from an outside supplier 70 136 Annual demand (units) 36,000 44,000

Explanation / Answer

1 Blender Electric mixer Cost if purchased from outside supplier 70 136 Less Variable cost Direct material 20 28 Direct labor 13 41 Variable manufacturing overheads 25 50 Total variable cost 58 119 Contribution margin 12 17 Number of machine hour per product 1 2 Contribution per machine hour 12 8.5 Machine hour used 36000 40000 76000 Units to be produced 36000 20000 Units to be bought 24000 Total units demand 36000 44000 2 Blender Electric mixer Cost if purchased from outside supplier 70 136 Less Variable cost Direct material 20 20 Direct labor 13 41 Variable manufacturing overheads 25 50 Total variable cost 58 111 Contribution margin 12 25 Number of machine hour per product 1 2 Contribution per machine hour 12 12.5 Machine hour used 0 76000 76000 Units to be produced 0 38000 Units to be bought 36000 6000 Total units demand 36000 44000

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