Question

Problem 4

Able sells three products that use the same machine and there is a scarcity of hours available on the machines. Only 50,000 hours are available and total fixed expenses are $1,100,000. Below is information regarding the products:

                                                             A                      B                         C

Sales Price                                     $200                 $180                  $170

Variable Expense                           100                      90                    100

Contribution Margin                     100                      90                      70

Machine Hours/Unit                        4                         5                        2

Demand                                         4,000                  5,000               8,000

Required: Determine the order the products should be made in and how much should be made and what the overall operating income will be.

What should we do and how much income will be earned if the optimum mix is used?

Answer 1

Data for Calculations and Statement of Ranking
	A	B	C
Contribution Margin	$ 100.00	$    90.00	$    70.00
machine Hours Per unit	4	5	2
Contribution margin per machine hour	$    25.00	$    18.00	$    35.00
Rank	II	III	I

Statement of Optimum Product Mix
Product	Units to be Produced	Machine Hour per Unit	Machine hours consumed
C (Rank I)	4000	2	8000.00
A (Rank II)	5000.00	4	20000.00
B (Rank III)	4400	5	22000.00
Maximum Quantity			50000.00

Income Statement
	A	B	C	Total
Sales	$ 1,000,000.00	$ 792,000.00	$ 680,000.00	$ 2,472,000.00
Less: Variable Cost	$      500,000.00	$ 396,000.00	$ 400,000.00	$ 1,296,000.00
Contribution margin	$      500,000.00	$ 396,000.00	$ 280,000.00	$ 1,176,000.00
Fixed cost				$ 1,100,000.00
Net operating Income				$        76,000.00

Order of production

First Product C

Second Product A

Third Product B

Units to be produced

Product C 4000 units

Product A 5000 units

Product B 4400 units

Operating income will be $ 76,000.00