Product mix decision: Unlimited demand (Learning Objective 5) Storage Solutions

Question

Product mix decision: Unlimited demand (Learning Objective 5) Storage Solutions produces plastic storage bins for household storage needs. The com- pany makes two sizes of bins: Large (50 gallon) and Regular (35 gallon). Demand for the product is so high that the company can sell as many of each size as it can produce. The same machinery is used to produce both sizes. The machinery is available for only 3,000 hours per period. The company can produce 10 Large bins every hour compared to 15 Regular bins in the same amount of time. Fixed expenses amount to $110,000 per period. Sales prices and variable costs are as follows: S8-9 Regular $8.10 $3.50 Large s10.50 $ 4.20 Sales price per 1. 2. 3. Which product should Storage Solutions emphasize? Why? To maximize profits, how many of each size bin should the company produce? Given this product mix, what will the company's operating income be?

Explanation / Answer

1 Regular Large Sales price per unit 8.1 10.5 Variable cost per unit 3.5 4.2 Contribution margin per unit 4.6 6.3 Machine hour per unit 0.067 0.100 Contribution margin per machine hour 69 63 Regular model should be emphasized as it has greater contribution margin per machine hour 2 Regular size bin to be produced = 3000*15 = 45000 Large size bin to be produced =0 3 Company's operating income = (45000*4.6)-110000= $97000

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