Question

Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow.

	Basic			Classic			Formal
Sales price	$	38		$	70		$	200
Maximum annual demand (units)		18,000			11,000			28,000
Input requirement per unit
Direct material		0.7	yards		0.5	yards		0.8	yards
Direct labor		0.9	hours		2	hours		8	hours

Costs
Variable costs
Materials	$	18	per yard
Direct labor	$	14	per hour
Factory overhead	$	5	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	50,000
Marketing	$	7,500
Administration	$	44,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 35,500 direct labor-hours per year caused by the plant layout.

Required:

a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below

a-2. How much operating profit could the company earn if it were able to satisfy the annual demand?

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor.

b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?

c. Given the information in the problem so far, what product mix do you recommend?

d-1. Calculate the contribution margin for each type of dress shirt using the table below.

d-2. How much operating profit should your recommended product mix generate?

e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 17,000 more hours. The direct labor cost would increase from $14 to $17 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?

Answer 1