Question

Holvey Company makes three products in a single facility. Data concerning these products follow:

	Product
	A			B			C
Selling price per unit	$	70.00		$	92.40		$	85.90
Direct materials	$	34.00		$	50.50		$	56.90
Direct labor	$	21.40		$	24.00		$	14.80
Variable manufacturing overhead	$	1.20		$	.60		$	.50
Variable selling cost per unit	$	1.80		$	2.30		$	2.10
Mixing minutes per unit		1.20			.80			0.40
Monthly demand in units		2,000			4,000			2,000

The mixing machines are potentially the constraint in the production facility. A total of 6,300 minutes are available per month on these machines. Direct labor is a variable cost in this company. a) how many minutes of mixing machine time would be required to satisfy demand for all three products? b) what is the contribution margin per constrained resource for each of the three products? c) based on analysis in (b), how many units of each product should be produced to maximize net op income? d) up to how much should the company be willing to pay for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

Constraint = Maxing machine time

	A	B	C
Monthly Demand in Units	2,000	4,000	2,000
Mixing Minutes per Unit	1.20	.80	.40
Total Mixing Minutes required	2,400	3,200	800

1. Minutes of mixing machine time would be required to satisfy demand for all three products = 2,400+3,200+800 = 6,400 minutes
2. Contribution margin per constrained resource for each of the three products:

	A	B	C
Selling price per Unit	70.00	92.40	85.90
Direct Materials	34.00	50.50	56.90
Direct Labor	21.40	24.00	14.80
Variable Manufacturing Overhead	1.20	.60	.50
Variable Selling Cost per Unit	1.80	2.30	2.10
Total Variable Cost per Unit	58.4	77.4	74.3
Contribution Margin per Unit (A)	11.6	15	11.6
Mixing Minutes per Unit (B)	1.20	.80	.40
Contribution per minute (A)/(B)	9.67	18.75	29

C)Optimum production should be:

C : 2,000 units

B: 4,000 units

A (remaining) : 1,916 units

d)The company should be willing to pay for one additional minute of mixing machine time if the company has made the best use of the existing mixing machine capacity = Pr ice per minute + Contribution Margin per hour

= Current Cost + 9.67