Question

TB Problem Qu. 12-195 Glover Company makes three products ...

Glover Company makes three products in a single facility. These products have the following unit product costs:

	Product
	A		B		C
Direct materials	$	33.60	$	50.10	$	56.50
Direct labor		21.00		23.60		14.40
Variable manufacturing overhead		2.00		1.40		0.10
Fixed manufacturing overhead		12.70		8.30		8.90
Unit product cost	$	69.30	$	83.40	$	79.90

Additional data concerning these products are listed below.

	Product
	A		B		C
Mixing minutes per unit		2.00		0.40		0.30
Selling price per unit	$	66.00	$	88.40	$	81.90
Variable selling cost per unit	$	1.40	$	1.90	$	1.70
Monthly demand in units		2,800		4,100		2,100

The mixing machines are potentially the constraint in the production facility. A total of 7,770 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all three products?

b. How much of each product should be produced to maximize net operating income?

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

a) minutes of mixing machine time would be required to satisfy demand for all three products

Particulars	Monthly demand in units (a)	Mixing minutes per unit (b)	Mixing minutes required (axb)
Product A	2,800	2.00	5600
Product B	4100	0.40	1640
Product C	2,100	0.30	630
		Total Minutes required	7870 Minutes

Total Minutes required to satisfy demand for all three products = 7,870 minutes

b)

Total 7870 minutes to satisfy demand for all three products but only 7,770 minutes available so we have allocate mixing minutes to products according their Contribution margin per minute.

	Product A	Product B	Product C
Selling Price Per Unit	$ 66.00	$ 88.40	$ 81.90
Variable Costs per Units:
Direct materials	$ 33.60	$ 50.10	$ 56.50
Direct labor	21.00	23.60	14.40
Variable manufacturing overhead	2.00	1.40	0.10
Variable selling cost per unit	1.40	1.90	1.70
Contribution Margin (a) (Selling Price - Variable Costs)	$ 8.00	$ 11.40	$ 9.20
Mixing Minutes per Unit (b)	2.00	0.40	0.30
Contribution Margin per Mixing Minute (a/b)	$4.00	$28.50	$30.67
Ranking for allocation of mixing minutes	III	II	I
units of each product should be produced to maximize net operating income (Note 1)	2750 units	4100 units	2,100 units

Note 1
As per Contribution Margin per Mixing Minute company should produced Product C first, then Product B and in last Product C. Hence Available minutes for Product C is (7770 - 630-1640) = 5500 minutes
means 5500/2 = 2750 units of product C may be produced

C)
company Should willing to pay for one additional hour
                   = Contribution Margin per Mixing Minute of Product A x 60 minutes
                  = $4.00 x 60
                 = $240