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 Product B Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month Product G S 70 20 S 50 S 100 60 S 40 1.0 hours 200 units 0.4 hours 600 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 $5,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.) 1. Determine the contribution margin per machine hour that each product generates Product G Product B Contribution margin per unit Contribution margin per machine hour Product G Product B Total Maximum number of units to be sold 600 200 Hours required to produce maximum units 2. 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?

Explanation / Answer

(1) Product G Product B Contribution Margin Per Unit $50 $40 Machine Hours per unit 0.4 hours 1.0 hours Contribution Margin Per Machine Hour 125 40 Maximum Number of units to be sold 600 200 Hours required to produce maximum units 240 200 (2) Product G Product B Total Hours dedicated to production of each product 176            -   Units produced for most profitable sales mix 440            -   Contribution margin per unit $50 $40 Total Contribution margin - one shift $22,000            -   $22,000 Note : Hours available in single shift = 22 days per month * 8 hours per shift 176 (3) Product G Product B Total Hours dedicated to production of each product 240 112 Units produced for most profitable sales mix 600 112 Contribution margin per unit $50 $40 Total Contribution margin - two shifts $30,000 $4,480 $34,480 Note : Hours available in two shifts = 22 days per month * 8 hours per shift * 2 352 Increase in contribution margin due to second shift $12,480 Additional fixed costs ($5,000) Increased benefit due to second shift $7,480 (4) Product G Product B Total Hours dedicated to production of each product 280 72 Units produced for most profitable sales mix 700 72 Contribution margin per unit $50 $40 Total Contribution margin - two shifts and marketing campaign $35,000 $2,880 $37,880 Note : Hours available in two shifts = 22 days per month * 8 hours per shift * 2 352 Increase in contribution margin due to second shift and marketing $15,880 Additional fixed costs ($9,000) Increased benefit due to second shift $6,880 As increased benefir decreases after marketing campaign, it should not be implemented.

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