Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

	Product G					Product B
Selling price per unit			$	220				$	250
Variable costs per unit				95					150
Contribution margin per unit			$	125				$	100
Machine hours to produce 1 unit		0.4	hours				1.0	hours
Maximum unit sales per month		650	units				250	units

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $12,500 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit Contribution margin per machine hour Product G Product B Total Maximum number of units to be sold 650 250 Hours required to produce maximum units 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - one shift 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total incremental income would this mix produce each month? Should the company add the new shift? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts Total incremental income 4. Suppose the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $11,500 per month in marketing efforts. Should the company pursue this strategy and the double shift? Compute total incremental income. Product G Product B Total Second shift without marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $0 $0 Second shift with marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $0 $0

Answer 1

1.Calculation of Contribution Margin per Machine Hour:

	Product G	Product B
Contribution Margin per Unit (A)	125	100
Machine hours per unit (B)	0.4	1.0
Contribution Margin per Machine Hour (A/B)	312.5	100

	Product G	Product B	Total
Maximum number of units	650	250
Hours required to produce maximum units	650*0.4 = 260	250*1 = 250	510

2. Since Contribution per hour is higher for G, it will be produced first

	G	B	Total
Hours dedicated	176	0	176
Units produced	440	0	440
Contribution Margin per Unit	125	100
Total CM – One Shift	55,000	0	55,000

3. Another shift

Total hours available now = 8*22*2 = 352

	G	B	Total
Hours dedicated	260	92
Units produced	650	92
CM per Unit	125	100
Total CM two shifts	81,250	9,200	90,450
One shift			55,000
Change			35,450
Less: Additional Fixed Costs			12,500
Change in Income			22,950
Incremental Income			22,950
Should the company add?	Yes

Hence, double shift should be done

4.

	G	B	Total
Without campaign
Units Produced	650	92
CM per Unit	125	100
TCM	81,250	9,200	90,450
Additional fixed costs			12,500
Incremental Income			77,950
With campaign
Units Produced	700	72
CM per Unit	125	100
TCM	87,500	7,200	94,700
Additional fixed costs			11,500
Additional marketing costs			11,500
Incremental Income			71,700
Change in Incremental Income			(6,250)
Pursue strategy and double shift?	NO

Marketing expenditure should not be done.