Question

Gluth Company makes three paint products in a single facility. These products are produced and sold in 5 gallon units. Each has the following unit product costs: Products A B C Direct materials ......................................... $22.50 $22.40 $29.20 Direct labor ................................................ 13.60 11.40 12.50 Variable manufacturing overhead ............. 3.00 3.40 4.50 Total variable unit product cost ................. $39.10 $37.20 $46.20 Additional data concerning these products are listed below. Products A B C Mixing minutes per unit.............................. 3.30 1.70 1.80 Selling price per unit ................................... $84.70 $76.10 $87.50 Variable selling cost per unit ...................... $1.80 $2.40 $2.90 Monthly demand in units ............................ 4,000 2,000 4,000 Mixing machine time is limited in the production facility. A total of 21,000 minutes are available per month on these machines. Direct labor is a variable cost in this company. Fixed manufacturing overhead is $155,000 and fixed selling & administrative expenses are $62,000 per month. Question: A local company has additional mixing machine time available and is willing to rent time on one of its machines so that Gluth can satisfy customer demand for all products. The rental charge will cover all product related costs except direct materials; which must be provided by Gluth. Assuming Gluth has used its mixing machines in the most optimal fashion, what is the maximum amount they should be willing to pay the outside company for one additional hour of mixing machine time so as to not sell product at a loss? Round to the near

Answer 1

calculation of conribution margin per unit :

particulars	product A	product B	product C
selling price per unit	84.70	76.10	87.50
variable costs per unit :
direct material	22.50	22.40	29.20
direct labor	13.60	11.40	12.50
variable manufacturing overheads	3.00	3.40	4.50
variable selling cost	1.80	2.40	2.90
total variable cost per unit	40.9	39.6	49.1
contibution margin per unit ( working note 1)	43.8	36.5	38.4
mixing minutes per unit	3.30	1.70	1.80
contribution margin per minute (working note 2)	13.27	21.47	21.33

working note 1 :

contribution margin per unit = selling price - total variable cost

product A : contribution margin = 84.7 - 40.9

= 43.8

product B : contribution margin = 76.1 - 39.6

= 36.5

product C : contribution margin = 87.5 - 49.1

= 38.4

working note 2 :

contribution margin per minute = contribution margin per unit / mixing minutes per unit

product A :

contribution margin per minute = 43.8 / 3.30

= $ 13.27

product B :

contribution margin per minute = 36.50 / 1.70

= $ 21.47

product C :

contribution margin per minute = 38.40 / 1.80

= $ 21.33

The company should willing ton pay up to the contribution margin per minute for the

product A is $ 13.27

product B is $ 21.47

product C is $ 21.33