Question

Makita Inc. manufactures a variety of battery-powered hand tools. The company has assembled the following data pertaining to its two most popular products:

	Drill	Saw
Direct Materials	$60	110
Direct Labour	40	90
Manufacturing Overhead*	160	320
Cost if purchased from outside supplier	200	380
Annual Demand in units	200,000	220,000

* The manufacturing overhead is applied at a rate of $80 per machine hour used in production. Twenty five percent of the MOH is variable in nature and the remaining seventy five percent is fixed. Makita only has 500,000 hours of machine time available for making these two tools this year. When Makita cannot satisfy the demand for its products, the company will buy units from an outside supplier.

Required:

How should Makita use this year’s limited supply of machine hours? How many of each product should they make themselves and how many units should be purchased from the outside supplier?

Answer 1

Contribution margin per MH:
			Drill	Saw
Selling price-Cost of supplier	200	380
Less: Variable cost
Material			60	110
labour			40	90
variable oh		80	160
Contribution margin per unit	20	20
Divide: MH used per unit	2	4
Contribution margin per MH	10	5
Rank			First	Second
			Drill	Saw	Total
Max demand		200000	220000
Multiply: MH per unit	2	4
Total MH required		400000	880000	1280000
MH available				500000
MH Proposed Usage		4,00,000	1,00,000	5,00,000
		Use of MH
Drill		4,00,000	MH
Saw		1,00,000	MH
Number of units produced
		Usage of MH	MH per unit	Units produced
Drill		400000	2	2,00,000
Saw		100000	4	25,000
Number of units Purchase
		Max Demand	Units Prod.	Units Purchased
Drill		2,00,000		2,00,000	0
Saw		2,20,000		25,000	1,95,000