Question

1. Ohio Chemical manufacturers a variety of household products. Because of a recent shortage of mytron – a key ingredient needed for two of its products – Ohio trying to decide how much of it. Information related to the two products that use mytron are shown below:

Paint remover   Laundry Detergent
Sales price (per case) $50 $40
Variable costs (per case) $26 $20
Mytron ounces required per case 3 2
Maximum monthly demand (cases) 500 400

Assume that Ohio only has 2,000 ounces of mytron available next month. What is the maximum contribution margin that Ohio can generate from the two products?

2.

Smith produces 4,000 microwaves annually, but has capacity to produce much more. Each microwave produced has $22 of variable costs. Smith has an additional $32,000 of fixed cost related to microwave production. Microwaves are typically sold to retailers for $60. Wal-Mart, however, offers to purchase 1,000 microwaves at a discounted price of $35 each. If Smith accepts Wal-Mart’s order, Smith would incur special shipping costs of $5,000. If Wal-Mart’s order is accepted, by what amount would Smith’s profit change?

Answer 1

Answer:

1.

Contribution Margin per case (Laundry) = $50 - $26 = $24 per case

Contribution Margin per case (Detergent) = $40 - $20 = $20 per case

We shall compute contibution from two production mixes and choose mix which has higher contribution margin.

(a) Monthly demand (Laundry) = 500 cases

Each case requires 3 ounces. Total material required = 3 * 500 = 1,500 ounces

Out of 2,000 ounces,1,500 ounces only 500 ounces are remaining

With 500 ounces, 250 cases of Detergent can be produced (500 / 2)

Total Contribution Margin from this mix

= (500 cases * $24 per case) + (250 cases * $20 per case)

= $12,000 + $5,000

= $17,000

(b) Monthly demand (Detergent ) = 400 cases

Each case requires 2 ounces. Total material required = 2 * 400 = 800 ounces

Out of 2,000 ounces,800 ounces only 1,200 ounces are remaining

With 1,200 ounces, 400 cases of Laundry can be produced (1,200 / 3)

Total Contribution Margin from this mix

= (400 cases * $24 per case) + (400 cases * $20 per case)

= $9,600 + $8,000

= $17,600

The company can generate maximum contribution margin of $17,600 with the mix used in (b).

2.

Sales = 4,000 * $60 = $240,000

Sales if order is accepted = $240,000 + (1,000 * $35) = $240,000 + $35,000 = $275,000

Variable cost = 4,000 * $22 = $88,000

Variable cost if order is accepted = $88,000 + (1,000 * $22) = $88,000 + $22,000 = $110,000

Fixed cost = $32,000

Fixed cost if order is accepted = $32,000 + $5,000 = $37,000

If the Order is accepted the Profit will be increased by $8,000 ($128,000 - $120,000).