Question

In: Accounting

T&G Co. manufactures three types of computer desks. The income statement for the three products and...

T&G Co. manufactures three types of computer desks. The income statement for the three products and the whole company is shown below:
Product A Product B Product C Total
Sales $76,000 $104,000 $115,000 $295,000
Variable costs 41,000 69,000 105,000 215,000
Fixed costs 25,900 18,500 18,500 62,900
Total costs 66,900 87,500 123,500 277,900
Operating income (loss) $9,100 $16,500 $(8,500 ) $17,100

The company produces 1,000 units of each product. The company’s capacity is 17,000 machine hours. The machine hours for each product are 7 hours for Product A, 5 hours for Product B, and 5 hours for Product C. Fixed costs are allocated based on machine hours.

1. The company has a contract that requires it to supply 570 units of each product to a customer. The total market demand for a single product is limited to 1,500 units. How many units of each product should the company manufacture to maximize its total contribution margin including the contract?

T&G Co. should manufacture
Product A units
Product B units
Product C units

Solutions

Expert Solution

Contribution margin = Sales - Variable cost

Contribution margin per limiting factor = Contribution margin/ Limiting factor per unit

Product A

Contribution margin = 76,000 - 41,000 = $35,000

Contribution margin per limiting factor

= 35,000/7

= $5,000

Product B

Contribution margin = 104,000 - 69,000 = $35,000

Contribution margin per limiting factor

=35,000/5

= $7,000

Product C

Contribution margin = 115,000 - 105,000 = $10,000

Contribution margin per limiting factor

= 10,000/5

= $2,000

Therefore as the contribution margin per limiting factor is highest of product B therefore maximum of Product B is to be produced . However 570 units each of product A and C is to produced first. And as the total demand for product is 1,500 units therefore second best product is product A as contribution margin per limiting factor is higher than C

Units of B = 1500 units

Hours used = 1500*5 = 7,500

Units of C = 570 units

Hours used = 570*5 = 2,850

Hours left = 17,000 - 7,500 - 2,850 = 6,650

Units of A = 6,650/7 = 950 units

Therefore total units are as follows

Product A = 950 units

Product B = 1,500 units

Product C = 570 units

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