Question

Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products.

	Blender				Electric Mixer
Direct material	$	22			$	32
Direct labor		15				43
Manufacturing overhead @ $54 per machine hour		54				108
Cost if purchased from an outside supplier		75				146
Annual demand (units)		38,000				45,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $27. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1. If 80,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?
2. With all other things constant, if management is able to reduce the direct material for an electric mixer to $22 per unit, how many units of each product should be manufactured? Purchased?

Answer 1

1)
Statement of Ranking	Blender	Electric Mixer
Direct Material	22	32
Direct Labor	15	43
Manufacturing overhead	27	54
Machine hours (A)	1	2
Total Variable Cost	64	129
Buying Cost	75	146
Saving (B)	11	17
Saving per hour (B/A)	11	8.5
Ranking	1	2nd
Statement of product mix (quantity to be manufactured)
Product	Units	Hour per unit	Hours
Blender	38000	1	38000
Electric Mixer	21000	2	42000
		Total	80000
Quantity to be purchased
Electric Mixer	24000	units
	(45000-21000)

Statement of Ranking	Blender	Electric Mixer
Direct Material	22	22
Direct Labor	15	43
Manufacturing overhead	27	54
Machine hours (A)	1	2
Total Variable Cost	64	119
Buying Cost	75	146
Saving (B)	11	27
Saving per hour (B/A)	11	13.5
Ranking	2nd	1st
2)
Statement of product mix (quantity to be manufactured)
Product	Units	Hour per unit	Hours
Electric Mixer	40000	2	80000
		Total	80000
Quantity to be purchased	Units
Electric Mixer	5000	(45000-40000)
Blender	38000