Question

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

	Blender	Electric Mixer
Direct Material	$26	$45
Direct Labor	$20	$33
Manufacturing overhead @ $54 per machine hour	$54	$108
Cost if purchased from an outside supplier	$68	$116
Annual demand (units)	$28,000	$34,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $42. Kitchen Magician's management has a policy of filling all sales orders, even if it means purchasing from outside suppliers.

1. If 60,000 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 $26 per unit, how many units of each product should be manufactured? Purchased?

Answer 1

Calculation of machine hr requirement
	Total demand	Machine hr per unit	Total hr
blender	28000	1	28000
electric mixer	34000	2	68000
Total machine hr required			96000
Less: machine hr available			60000
Machine hr shortage			36000
calculation of machine hr per unit = total manufacturing cost per product / machine hr rate blender = 54/54 = 1 hr electric mixer = 108/54 = 2hr 1.
Calculation of saving in manufacturing product over purchase
	Blender	electric mixer
Direct material	26	45
Direct labor	20	33
Variable manufactiring overhead	12	24
Total manufactring cost(x)	58	102
Purchase cost(y)	68	116
(A)Saving in manufactring product(y-x)	10	14
Machine hr required(B)	1	2
Saving in manufactring product (per machine hr)(A/B)	10	7
Ranking for manufacturing	1	2
Statement of production
Particulars	Hr per unit	Production	Total hr
Blender	1	28,000	28,000
	2	16,000	32,000	(balance)
Total available hr			60,000
Statement of units to be purchased
Particulars	Total demand(a)	Production(b)	Units to be purchased (a-b)
blender	28000	28000	0
electric mixer	34000	16000	18000

2.

Calculation of saving in manufacturing product over purchase
	Blender	electric mixer
Direct material	26	26
Direct labor	20	33
Variable manufactiring overhead	12	24
Total manufactring cost(x)	58	83
Purchase cost(y)	68	116
(A)Saving in manufactring product(y-x)	10	33
Machine hr required(B)	1	2
Saving in manufactring product (per machine hr)(A/B)	10	16.5
Ranking for manufacturing	2	1
Statement of production
Particulars	Hr per unit	Production	Total hr
Blender	1	-	-
	2	30,000	60,000	(balance)
Total available hr			60,000
Statement of units to be purchased
Particulars	Total demand(a)	Production(b)	Units to be purchased (a-b)
blender	28000	0	28000
electric mixer	34000	30000	4000