Question

Holton Company makes three products in a single facility. Data concerning these products follow:

	Product
	A		B		C
Selling price per unit	$	91.60	$	78.20	$	125.10
Direct materials	$	39.90	$	43.60	$	75.20
Direct labor	$	28.80	$	13.90	$	20.10
Variable manufacturing overhead	$	5.60	$	4.60	$	9.40
Variable selling cost per unit	$	8.70	$	3.30	$	5.80
Mixing minutes per unit		15.40		2.00		2.00
Monthly demand in units		3,000		1,000		2,000

The mixing machines are potentially the constraint in the production facility. A total of 14,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all three products?

b. How much of each product should be produced to maximize net operating income?

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

Answer:

a.         Computation of the following

Demand on the mixing machine:

		Product A	Product B	Product C
	Mixing minutes per unit.....	15.4	2	2
	Monthly demand in units...	3000	1000	2000
	Total minutes required.......	46200	2000	4000

Total time required for all products: 52200

b.         Computation of the following

Optimal production plan:

		Product A	Product B	Product C
	Selling price per unit............................	$91.60	$78.20	$125.10
	Direct materials....................................	$39.90	$43.60	$75.20
	Direct labor..........................................	28.80	13.90	20.10
	Variable manufacturing overhead........	5.60	4.60	9.40
	Variable selling cost per unit................	8.70	3.30	5.80
	Total variable cost per unit...................	$83.00	$65.40	$110.50
	Contribution margin per unit...............	$8.60	$12.80	$14.60
	Mixing minutes per unit.......................	c 15.40	b 2	a 2
	Contribution margin per minute...........	$0.56	$6.40	$7.30
	Rank in terms of profitability..............	3	2	1
	Optimal production..............................	519 (note)	1000	2000

note : 14000 minutes - (2000*2 a)+(1000*2 b) = 8000 minutes

= 8000 minutes

8000 / 15.40 c = 519.48 rounded 519 units

c.        Computation of the following

The company should be willing to pay up to the contribution margin per minute for the marginal job, which is $0.56.