Question

Shred, Inc. manufactures two types of paper shredders, Mini and Deluxe. Here are data for the current month:

Mini shredder Deluxe shredder

Selling price $240 per unit $480 per unit

Variable costs $160 per unit $370 per unit

Shred can manufacture 40 Mini shredders per hour but only 20 Deluxe shredders per hour. Fixed costs are $1.2 million per month and Shred’s maximum operating capacity is 600 hours per month. Fixed costs are unaffected by the mix of products produced. Monthly demand is 17,000 Mini shredders and 10,000 Deluxe shredders.

a. What is Shred’s operating income if it allocates the 600 operating hours 50-50 between Mini and Deluxe shredders? __________

b. What is Shred’s operating income if it emphasizes the product with the highest contribution margin per unit of constraint? ________

Answer 1

	Mini Shredder	Deluxe Shredder
Selling price	240	480
(-) Variable cost	160	370
Contribution margin per unit	80	110

a.
Unit of mini shredder that can be produced = ( 600 * 50% ) * 40	12000
Unit of Deluxe shredder that can be produced = ( 600 * 50% ) * 20	6000
Operating income = ( Units of Mini shredder * Contribution margin per unit ) + ( Units of Deluxe shredder * Contribution margin per unit ) - Fixed costs = ( 12000 * 80 ) + ( 6000 * 110 ) - 1200000	420000

b.
	Mini Shredder	Deluxe Shredder
Selling price	240	480
(-) Variable cost	160	370
Contribution margin per unit	80	110
(*) Units per hour	40	20
Contribution margin per hour	3200	2200

As, the contribution margin per hour of Mini shredder is more than Deluxe shredder, company will first fully satisfy the demand of Mini shredder and then it will produce Deluxe shredder.
Total hours available	600
Hours required for mini shredder = 17000 / 40	425
Units of Deluxe shredder than can be produced = ( 600 - 425 ) * 20	3500	units

Operating income = ( Units of Mini shredder * Contribution margin per unit ) + ( Units of Deluxe shredder * Contribution margin per unit ) - Fixed costs = ( 17000 * 80 ) + ( 3500 * 110 ) - 1200000

545000