Question

Problem 14-44 Production Decisions; Limited Capacity (LO 14-5, 14-6)

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

	Blender				Electric Mixer
Direct material	$	22			$	37
Direct labor		16				29
Manufacturing overhead @ $46 per machine hour		46				92
Cost if purchased from an outside supplier		64				109
Annual demand (units)		24,000				36,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $34. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

If 58,000 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?

If 58,000 machine hours are available!!! With all other things constant, if management is able to reduce the direct material for an electric mixer to $22 per unit, how many units of each product should be manufactured? Purchased

Answer 1

Answer 1st part:

Manufacturing overhead per machine hour = $46

Manufacturing overhead per unit of Blender = $46

Hence machine hour required per unit of blender = 1 hour

Manufacturing overhead per unit of Electric Mixture = $92

Hence machine hour required per unit of blender = $92/$46 = 2 hours

Further:

Fixed manufacturing overhead component included in the cost per machine hour averages = $34

Manufacturing overhead per unit of Blender = $46

Hence,

Variable manufacturing overhead per unit of Blender = $46 - $34 = $12

Variable manufacturing overhead per unit of Electric mixture = $92 - (2* $34) = $24

We calculated below extra buying cost per machine hour for Blender and for Electric Mixture:

When required, it is better to buy Electric Mixture from the market because excess buying cost per machine hour is less.

Available machine hours = 58,000

Annual demand for Blenders = 24,000

Machine Hours required to produce 24,000 blenders = 24,000

Machine hours available for producing Electric mixture = 58,000 - 24,000 = 34,000

Number of electric mixture that can be produced = 34,000 / 2 =17,000

Annual demand of electric mixture = 36,000

Number of units of electric mixture required to be purchased from outside = 36,000 - 17,000 =19,000

Hence, optimal strategy will be:

Manufacture blender units = 24,000 units

Manufacture electric mixture units = 17,000 units

Purchase electric mixture units from outside = 19,000 units

Answer 2nd part:

If management is able to reduce the direct material for an electric mixer to $22 per unit:

Now we observe extra buying cost per machine hour for blender is less. Hence when required, it is better to buy blender from the market.

In this case:

Number of units of electric mixture that can be manufactured = 58,000 /2 = 29,000 units.

Purchase the balance required electric mixture from outside = 36,000 - 29,000 = 7,000 units

Purchase all required blenders from outside = 24,000 units

Hence, optimal strategy will be:

Manufacture electric mixture units = 29,000 units

Purchase electric mixture units from outside = 7,000 units

Purchase all required blender units from outside = 24,000 units