Question

Question 2                                                                                                           (Total: 26 marks)

Cavendish Cheese Company

makes three products within their single facility. Data concerning these products follow:

	Products
	A	B	C
Selling price per unit	$67.90	$57.70	$43.90
Direct materials	$12.10	$10.30	$8.60
Direct labour	$14.10	$8.00	$6.80
Variable manufacturing overhead	$2.60	$2.20	$1.80
Variable selling cost per unit	$2.50	$2.20	$2.50
Mixing minutes per unit	2.70	3.30	4.70
Monthly demand in units	1,000	3,000	3,000

The mixing machines are potentially a constraint in the production facility. A total of 25,800 minutes are available per month on these machines.

Direct labour is a variable cost in this company.

Required:

1. How many minutes of mixing machine time would be required to satisfy demand for all three products?
2. How much of each product should be produced, rounded to the nearest whole unit, to maximize operating income?
3. Up to how much should the company be willing to pay, rounded to the nearest whole cent, for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

Calculations are as follows:-

c). Here monthly demand of A and B is fully met except C where only 2808 units can be produced instead of 3000 units hence the additional mixing minute time will be required only for product C hence the cost can be increased by contribution margin per mixing minute.
Amount the company is willing to pay for additional minute of mixing time = $1.80 + $5.15 = $6.95