Question

Problem 10-5A Analysis of sales mix strategies LO A1

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			$	70				$	100
Variable costs per unit				20					60
Contribution margin per unit			$	50				$	40
Machine hours to produce 1 unit		0.4	hours				1.0	hours
Maximum unit sales per month		600	units				200	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 $5,000 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 600 200 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 contribution margin would 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 - two shifts 4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $4,000 per month in marketing efforts. Should the company pursue this strategy and the double 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 and marketing campaign

Answer 1

1						product G	product B
	Contribution margin per unit					50	40
	machine hours per unit					0.4	1
	contribution margin per machine hour					125	40
						product G	product B	total
	Maximum number of units to be sold					600	200
	hours required to produce maximum units					240	200	440
2)						product G	product B	total
	hours dedicated to the production of each product					176		176
	units produced for most profitable sales mix					440
	contribution margin per unit					50
	total contribution margin - one shift					22000		22,000
3)						product G	product B	total
	hours dedicated to the production of each product					240	112	352
	units produced for most profitable sales mix					600	112
	contribution margin per unit					50	40
	total contribution margin-two shifts					30000	4480	34480
	contribution margin -one shifts							22,000
	change in contribution margin							12,480
	change in fixed costs							5,000
	change in operating income (loss)							7,480
	should the company pursue marketing campaign					yes
4)						product G	product B	total
	hours dedicated to the production of each product					280	72	352
	units produced for most profitable sales mix					700	72
	contribution margin per unit					50	40
	total contribution margin-two shifts & marketing campaogn					35000	2880	37880
	contribution margin -two shifts without marketing ca							34,480
	change in contribution margin							3,400
	Additional marketing costs							4,000
	change in fixed costs							5,000
	change in operating income (loss)							-5,600
	should the company pursue marketing campaign					No