Question

Banksy Ltd manufactures two products, the first product is a bag with a specific print on them and the second product is a series of postcards (sold in a pack of 10) with the same print on them. Information regarding the costs associated with both the bags and postcards is below:

Bags: has a selling price of $30, and variable costs of $12 per unit. The bags need to be put through the printing machine once sewn and require 1.5 hours on the machine.

Postcards: the pack has a selling price of $10, and variable costs of $5 per unit. The postcards also need to be put in the printing machine for only 15 minutes per pack.

Maximum demand is 200 units per product and the printing machines capacity is limited to 100 hours.

Determine how the 100 hours of printing machine time should be allocated to the two products to provide the most profitable mix. Show all workings.

Answer 1

	Bags	Postcards
Selling price per unit	30	10
Variable cost per unit	- 12	- 5
Contribution margin per unit	18	5
Machine hours per unit	1.5	0.25
Contribution margin per Machine hour	18/1.5 = $12	5/0.25 = $20

Since Contribution margin per Machine hour of Postcards is higher, hence from the available machine hours, first Postcards will be made and from remaining machine hours, Bags will be made.

Maximum demand of Postcards = 200 units

Machine hours per unit of Postcard = 0.25

Machine hours used in making Postcards =  Maximum demand of Postcards x Machine hours per unit of Postcard

= 200 x 0.25

= 50

Total machine hours available = 100

Machine hours remaining to make Bags = Total machine hours available - Machine hours used in making Postcards

= 100 - 50

= 50

	Bags	Postcards
Machine hours	50	50