Question

Sheridan Innovations, Inc. produces exercise and fitness gear. Two of its newer products require a finishing process that can only be completed on machines that were recently purchased for this purpose. The machines have a maximum capacity of 6,000 machine hours, and no other products that the company makes use these machines.

Sarah Jacob, the company’s operations manager, is preparing the production schedule for the coming month and can’t seem to find enough machine time to produce enough units to meet the customer demand that the marketing department has included in the sales budget.

Michael Stoner, the company’s controller, has gathered the following information about the two products:

		Dumbbell Rack				Weight Bench
Selling price per unit			$49				$59
Direct materials			19				14
Direct labor			4				8
Variable overhead			2				6
Fixed overhead			6				10
Profit per unit			$18				$21
Unit sales demand			4,000				7,000
Machine hours per unit			0.50				0.80

After hearing about Sarah’s recommendation to increase the weight bench price to $69, Scott Wilson, the sales manager, suggested that the company raise the price of the dumbbell rack instead. He believes that if the price is increased to $56, demand will fall to 2,000 units. How should Sarah allocate the 6,000 machine hours under Scott’s proposal?

After hearing about Sarah’s recommendation to increase the weight bench price to $69, Scott Wilson, the sales manager, suggested that the company raise the price of the dumbbell rack instead. He believes that if the price is increased to $56, demand will fall to 2,000 units. What total contribution margin will Sheridan earn?

Answer 1

	Dumbbell Rack	Weight Bench
Selling Price	$                    56.0	$                   59.0
Direct Material	$                    19.0	$                   14.0
Direct Labor	$                      4.0	$                     8.0
Variable Overhead	$                      2.0	$                     6.0
Contribution Margin	31	31
Machine Hours Per Unit	0.5	0.8
Contribution Margin per Machine Hour	$                  62.00	$                38.75
Contribution Margin per Machine Hour is high in case of Dumbbell Rock therfore company should produce entire 2000 units of dumbbell rock, Remaining 5000 hours can be used to produce Weight Bnch
	Hours Allocated	Hours per Unit	Unit to be produced
Dumbbell Rock	1000	0.5	2000
Weight Bench	5000	0.8	6250
Calculation of Total Contribution Margin
	Dumbbell Rack	Weight Bench
Contribution Margin	$                  31.00	$                31.00
Units	2000	6250
Total Contribution Margin	$         62,000.00	$    1,93,750.00
Total Contribution Margin	$                                       2,55,750.00