Question

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

	Blender				Electric Mixer
Direct material	$	22			$	37
Direct labor		16				29
Manufacturing overhead @ $46 per machine hour		46				92
Cost if purchased from an outside supplier		64				109
Annual demand (units)		24,000				36,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $34. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1. If 58,000 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

Solution 1:

Computation of contribution margin per grinding minute
	Blender	Electric Mixer
Cost if purchased from an outside supplier	$64.00	$109.00
Variable costs:
Direct materials	$22.00	$37.00
Direct labor	$16.00	$29.00
Variable Overhead (Total Overhead- $34 per Hour)	$12.00	$24.00
Total variable costs	$50.00	$90.00
Total Saving per unit	$14.00	$19.00
Machine Hours per unit	1	2
Contribution margin per Machine Hour	$14.00	$9.50
Rank	1	2
Units of each product to be produced
	Machine hours per unit	Units to be produced
Blender	1.00	24000
Electric Mixer (58000-24000)/ 2	2.00	17000
	Units Purchased
Blender	0
Electric Mixer (36000-17000)	19000

Solution 2:

Computation of contribution margin per grinding minute
	Blender	Electric Mixer
Cost if purchased from an outside supplier	$64.00	$109.00
Variable costs:
Direct materials	$22.00	$22.00
Direct labor	$16.00	$29.00
Variable Overhead (Total Overhead- $34 per Hour)	$12.00	$24.00
Total variable costs	$50.00	$75.00
Total Saving per unit	$14.00	$34.00
Machine Hours per unit	1	2
Contribution margin per Machine Hour	$14.00	$17.00
Rank	2	1
Units of each product to be produced
	Machine hours per unit	Units to be produced
Blender	1.00	0
Electric Mixer (58000/2)	2.00	29000
	Units Purchased
Blender	24000
Electric Mixer (36000-29000)	7000