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		$	66		$	185
Maximum annual demand (units)		22,000			15,000			32,000
Input requirement per unit
Direct material		0.6 yards			0.2 yards			0.5 yards
Direct labor		0.8 hours			2 hours			7 hours

Costs
Variable costs
Materials	$	22	per yard
Direct labor	$	18	per hour
Factory overhead	$	3	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	54,000
Marketing	$	9,500
Administration	$	48,000

Required:

a.	How much operating profit could the company earn if it were able to satisfy the annual demand?
	Operating Profit =

b.	Which of the three product lines makes the most profitable use of the constrained resource, direct labor?
	Classic Basic Formal

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

d.	How much operating profit should your recommended product mix generate? (If needed, round your units to produce number downward to the nearest whole number.)
	Operating Profit =

e.	Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 19,000 more hours. The direct labor cost would increase from $18 to $22 per hour for all hours of direct labor worked during the extra shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?
	Austin Should Manufacture = Additional Profit Would Be =

Answer 1

	Basic	Classic	Formal
Annual Demand (units)	22,000	15,000	32,000
ii.) Direct Material per unit	0.6 yards	0.2 yards	0.5 yards
iii.) Total Direct Material Required        (i*ii)	13,200 yards	3,000 yards	16,000 yards
iv.) Direct Labor hours per unit	0.8	2	7
v.) Total Labor hours required        (i*iv)	17,600	30,000	224,000

a.)Operating Profit = Total Sales – Total Variable Expenses

	Basic		Classic		Formal
i.) Annual Demand (Units)		22,000		15,000		32,000
ii.) Sales price per unit	$	38	$	66	$	185
iii.) Total Sales (i*ii)	$	836,000	$	990,000	$	5,920,000
Less: Variable Expenses
Direct Material $22/yard	$	290,400 (13,200*4)	$	66,000 (3,000*22)	$	352,000 (16,000*22)
Direct Labor $18/hour	$	316,800 (17,600*18)	$	540,000 (30,000*18)	$	4,032,000 (224,000*18)
Factory Overhead $3/hour	$	52,800 (17,600*3)	$	90,000 (30,000*3)	$	672,000 (224,000*3)
Marketing Expenses 10% of sales	$	83,600	$	99,000	$	592,000
Total Variable Expenses	$	743,600	$	795,000	$	5,648,000
Operating Profit	$	92,400	$	195,000	$	272,000

b.)Most profitable use of the constraints resource, direct labor= (Operating Profit per unit/Direct labor hour per unit)

	Basic		Classic		Formal
i.) Annual Demands (units)		22,000		15,000		32,000
ii.) Operating Profit	$	92,400	$	195,000	$	272,000
iii.) Operating Profit per unit         (ii/i)	$	4.20	$	13.00	$	8.50
iv.) Direct labor hours per unit		0.8		2		7
v.) Profitable constraints       (iii/iv)	$	5.25	$	6.50	$	1.21

Classic Product line makes most profitable use of the constraints resource, direct labor.

c.) According to the information given we recommend Classic and basic product mix because they have the highest profitable constraints $6.50 per hour and $5.25 per hour respectively as compared to profitable constraints of Formal which is $1.21 per hour.

d.) According to the information given classic and product mix operating profit:

Basic operating profit + classic operating profit

=195,000+ 92,000

= 287,000

Total Units produce under basic and classic = 22,000+15,000

                                                                                      = 37,000

Operating profit per unit= 287,000/37,000

                                                = $7.75

e.) IF company has more hours to produce then company should produce the Classic shirt because they have used the direct labor more efficiently

Note: For the part c to e there must some information regarding the total number of direct labor hours company is operating throughout the year which is missing then the answer for part c to e can be provided more effectively.