Question

XY Corporation manufactures sport and casual shoes. Uses a machine, with maximum capacity of 1000 machine hours. Additional capacity cannot be obtained in the short-run. The following information is available:

	Sport Shoe	Casual Shoe
Selling price per unit ($)	70	50
Variable cost per unit ($)	19	13
Machine hours	4	2
Total monthly fixed costs ($)	10 000
Demand per month (units)	200	500

1. Calculate the product mix that XY corporation’s managers should choose to maximise operating income. Show your workings.
2. Assume capacity was no longer limited to 1000 machine hours. What is the revised product mix to maximise operating income?
3. XY corporation is considering either replacing the machine equipment with newer, more efficient equipment or outsourcing the manufacture of the shoes to a company in China. What considerations must XY corporation’s managers take into account when evaluating these decisions?

Answer 1

PART-A:

Calculation of product mix  to maximise operating income:

As there is a limitation in the machine hours, inorder to maximize the income the company should produce products in based on the product which has maximum contribution per machine hour.

Particulars	Sport Shoe	Casual Shoe
Selling price per unit	70	50
Variable cost per unit	19	13
Contribution per unit	51	37
Machine hours	4	2
Contribution per machine hour	12.75	18.5

As contribution per machine hour was higher for Casual Shoes the company should first produce all the demand for casual shoes.

Machine hours to produce Casual shoes = 500*2 = 1000 machine hours. So, the company should produce Only casual shoes & zero Sport shoes in order to maximise it's operating income.

PART-B:

If the Capacity is not limited. The Company should produce as per the demand in the market to maximise the profit.

That is 200 Sport shoes & 500 Casual shoes.

PART-C:

Considerations must XY corporation’s managers take into account when evaluating these decisions are:

• Cost - benefit analysis of replacing the old machine with new machine.
• Quality of the products manufactured by the China manufacturer has to considered.
• Longiviety of the contract with china manufacturer has to be considered.
• Reputation & credibility of the china manufacturer has to be considered.