In: Accounting
Bacon Company makes four products in a single facility. These
products have the following unit product costs:
Products | |||||||||||||||
A | B | C | D | ||||||||||||
Direct materials | $ | 14.45 | $ | 10.35 | $ | 11.15 | $ | 10.75 | |||||||
Direct labor | 19.55 | 27.55 | 33.75 | 40.55 | |||||||||||
Variable manufacturing overhead | 4.45 | 2.85 | 2.75 | 3.35 | |||||||||||
Fixed manufacturing overhead | 26.65 | 34.95 | 26.75 | 37.35 | |||||||||||
Unit product cost | $ | 65.10 | $ | 75.70 | $ | 74.40 | $ | 92.00 | |||||||
Additional data concerning these products are listed
below.
Products | |||||||||||||||
A | B | C | D | ||||||||||||
Grinding minutes per unit | 3.80 | 5.30 | 4.30 | 3.40 | |||||||||||
Selling price per unit | $ | 76.25 | $ | 93.65 | $ | 87.55 | $ | 104.35 | |||||||
Variable selling cost per unit | $ | 2.35 | $ | 1.35 | $ | 3.45 | $ | 1.75 | |||||||
Monthly demand in units | 4,060 | 4,060 | 3,060 | 2,060 | |||||||||||
The grinding machines are the constraint in the production
facility. A total of 53,900 minutes is available per month on these
machines.
Direct labor is a variable cost in this company.
Up to how much should the company be willing to pay for one
additional minute of grinding machine time if the company has made
the best use of the existing grinding machine capacity? (Round off
to the nearest whole cent.)
Solution :
(1) Contribution per Minute of Grinding Machine :
A | B | C | D | |
Sale Price per Unit | 76.25 | 93.65 | 87.55 | 104.35 |
Direct Material | 14.45 | 10.35 | 11.15 | 10.75 |
Direct Labor | 19.55 | 27.55 | 33.75 | 40.55 |
Variable OH | 4.45 | 2.85 | 2.75 | 3.35 |
Variable Selling Cost | 2.35 | 1.35 | 3.45 | 1.75 |
Contribution per Unit | $ 35.45 | $ 51.55 | $ 36.45 | $ 47.95 |
Grinding Minutes per Unit | 3.80 | 5.30 | 4.30 | 3.40 |
Contribution per Minute | $ 9.33 | $ 9.73 | $ 8.48 | $ 14.10 |
(2) Current Utilization of Machine :
Total Available Minutes | 53,900 |
Less : Production of D (2,060 * 3.40) | 7004 |
Available Minute after D | 46,896 |
Less : Production of B (4,060 * 5.30) | 21,518 |
Available Minute after B | 25,378 |
Less : Production of A (4,060 * 3.80) | 15,428 |
Available Minute after A | 9,950 |
Minutes required for Production of C (3,060 * 4.30) | 13,158 |
(2) Conclusion : Since the demand of product C is not fulfiled company can pay additional $ 8.48 per Minute which is the contribution per Minute of Product C.
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