Question

Norton Company produces two products (Juno and Hera) that use the same material input. Juno uses two pounds of the material for every unit produced, and Hera uses five pounds. Currently, Norton has 16,000 pounds of the material in inventory. All of the material is imported. For the coming year, Norton plans to import an additional 8,000 pounds to produce 2,000 units of Juno and 4,000 units of Hera. The unit contribution margin is $30 for Juno and $60 for Hera. Also, assume that Norton's marketing department estimates that the company can sell a maximum of 2,000 units of Juno and 4,000 units of Hera. Norton has received word that the source of the material has been shut down by embargo. Consequently, the company will not be able to import the 8,000 pounds it planned to use in the coming year's production. There is no other source of the material. Required: 1. Compute the total contribution margin that the company would earn if it could manufacture 2,000 units of Juno and 4,000 units of Hera. $ 300,000 2. Determine the optimal usage of the company's inventory of 16,000 pounds of the material. Product mix is units of Juno and units of Hera. Compute the total contribution margin for the product mix that you recommend. $ 204,000

Answer 1

1. Total Contribution margin earned if manufactured 2,000 units of Juno and 4,000 units of Hera.

	Juno	Hera	Total
Units	2,000	4,000.00
Contribution per unit	30	60.00
Total Contribution	60,000	240,000	300,000

2.

	Juno	Hera
Material required (A)	2	5.00
Contribution per unit (B)	30	60.00
Contribution per material unit (B /A)	15	12
Priority in Production	1	2

So, we will first produce the maximum of Juno

Table 1

	Maximum Demand	Priority	Produce	Material Required per unit	Total Material Required	Total Material Available	Balance Material
Juno	2,000	1	2,000	2	4,000	16,000	12,000

Table 2

	Balance Material	Material Required per unit	Total Units produced
Hera	12,000	5	2400

Contribution = $2,04,000

	Juno	Hera	Total
Units produced ( As per Table 1 & 2)	2,000	2,400.00
Contribution per unit (B)	30	60.00
Contribution per material unit (B /A)	60,000	144,000	204,000.00