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 G					Product B
Selling price per unit			$	190				$	220
Variable costs per unit				80					132
Contribution margin per unit			$	110				$	88
Machine hours to produce 1 unit		0.4	hours				1.0	hours
Maximum unit sales per month		550	units				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 $11,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

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?

            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 - two shifts                                   

                                   

                                   

                                   

                                   

                                   

4. Suppose that the company determines that it can increase Product G’s maximum sales to 600 units per month by spending $10,000 per month in marketing efforts. Should the company pursue this strategy and the double shift?

            Product G        Product B        Total

Hours dedicated to the production of each product                          

Units produced for most profitable sales mix                        

Contribution margin per unit             

Answer 1

	Product G	Product B
Contribution Margin per Unit	$ 110	$ 88
Machine Hours to produce one unit	0.40 hours	1 hour
Contribution Margin per machine hour	$ 275	$ 88

2. 440 units of Product G and 0 units of Product B would be possible. The maximum contribution margin = $ 48,400.

	Product G	Product B	Total
Hours dedicated to the production of each product	176	0	176
Units produced for most profitable sales mix	440	0
Contribution Margin per unit	$ 110	$ 88
Total Contribution Margin : One Shift	$ 48,400	$ 0	$ 48,400

Product G should be emphasized as it has a higher contribution margin per unit of constrained resource, i.e, machine hours.

Total machine hours available on single shift basis = 22 x 8 = 176

Product G has a maximum sales demand of 550 units. This would take up 550 x 0.40 = 220 machine hours. But 220 machine hours are not available. Only 176 machine hours are available. Therefore, maximum production of Product G = 176 / 0.4 = 440 unit. No machine hours remain for production of Product B.

Maximum contribution margin possible = 440 units x $ 110 per unit = $ 48,400.

3.

	Product G	Product B	Total
Hours dedicated to the production of each product	220	132	352
Units produced for most profitable sales mix	550	132
Contribution margin per unit	$ 110	$ 88
Total Contribution Margin : two shifts	$ 60,500	$ 11,616	$ 72,116

4.

	Product G	Product B	Total
Hours dedicated to the production of each product	240	112	352
Units produced for most profitable sales mix	600	112
Contribution Margin per unit	$ 110	$ 88
Total Contribution Margin : two shifts	$ 66,000	$ 9,856	$ 75,856
Total Contribution Margin : one shift			48,400
Change in Contribution Margin			27,456
Change in Fixed Costs $ ( 11,000 + 10,000)			21,000
Change in Operating Income ( Loss)			6,456
Should the company follow new marketing strategy and double shift ?			YES