Question

Product mix decision. The Jackson Company has one machine on which it can produce either of two products, Y or Z. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Jackson can sell all output at current prices. Product Y requires one hour of machine time per unit of output and Product Z requires two hours of machine time per unit of output. The following information summarizes the per-unit cash inflows and costs of Products Y and Z.

	Product Y (per unit)	Product Z (per unit)
Selling Price	$30	$55
Materials	$ 4	$ 6
Labor	1	3
Allocated Portion of Fixed Costs	14	26
Total Cost per Unit	$19	$35
Gross Margin per Unit	$11	$20

Selling costs are the same whether Jackson produces Product Y or Z, or both; you may ignore them.

Required:

Should Jackson Company plan to produce Product Y, Product Z, or some mixture of both? Why?

Answer 1

JACKSON COMPANY
PRODUCT COST & MARGIN MATRIX:
	Product Y (per unit)	Product Z (per unit)
Selling Price	$30.00	$55.00
Materials	$4.00	$6.00
Labor	$1.00	$3.00
Allocated Portion of Fixed Costs	$14.00	$26.00
Total Cost per Unit	$19.00	$35.00
Gross Margin per Unit	$11.00	$20.00
a) ASSUMING MACHINE RUNNING FOR 24 HOURS FOR SINGLE PRODUCT:
COST & BENEFITS SHALL BE AS FOLLOWS:
	Product Y	Product Z
Units produced (Y = 1 per hour, Z =1 per two hours)	24.00	12.00
Sales Revenue	$720.00	$660.00
Materials	$96.00	$72.00
Labor	$24.00	$36.00
Allocated Portion of Fixed Costs	$336.00	$312.00
Total Cost	$456.00	$420.00
Gross Margin	$264.00	$240.00
From above, it is concluded that if Jackson Company produces Product Y it will earn $264/- in 24 hours but if it produces Product Z, it will earn only $240/-.
Therefore, production of Product is more beneficial.
b) ASSUMING MACHINE RUNNING FOR 12 HOURS FOR EACH PRODUCT:
FOR PRODUCT MIX: COST & BENEFITS SHALL BE AS FOLLOWS:
	Product Y	Product Z	Total
Units produced (Y = 1 per hours, Z =1 per two hours)	12.00	6.00	18.00
Sales Revenue	$360.00	$330.00	$690.00
Materials	$48.00	$36.00	$84.00
Labor	$12.00	$18.00	$30.00
Allocated Portion of Fixed Costs	$168.00	$156.00	$324.00
Total Cost	$228.00	$210.00	$438.00
Gross Margin	$132.00	$120.00	$252.00
From above, it is clear that when machine is used 50% for each product, Jackson Company will earn $252/-.
Therefore, production of Product Y is more beneficial in all three option i.e. Product Y 100%, Product Z 100% or both 50% each.
Benefit summary is as follows	Ratio	Benefit	RANK
1. Product Y	100%	$264.00	1
2. Product Z	100%	$240.00	3
3. Product Y & Z	50% each	$252.00	2
Therefore product Y is most beneficial.
In other words, since product Y earns more per hour, hence it is beneficial