Question

Short Inc has 6,000 machine hours available each month. The following information on the company's three products is available: Product 1 Product 2 Product 3 Selling price $ 90.00 80.00 50.00 Variable cost per unit 30.00 54.00 $ 26.00 Machine hours per unit 5 2 1.5 Sales demand in units 500 1,000 2,000 Required: a. What production schedule will maximize the company's profits? b. What will be the maximum possible contribution margin? c. The company has an option of buying an additional machine for $55,000 to increase the total machine hours to 8,000. Assuming that this machine will last for 3 years and have no resale value at the end of its life, should the company buy this machine?

Answer 1

A	Particulars	Product 1	Product 2	Product 3
	Sales Demand	500	1000	2000
	Selling Price	90.00	80.00	50.00
	Less: Variable Costs	30.00	54.00	26.00
	Contribution Margin	60.00	26.00	24.00
	Machine Hours PU	5.00	2.00	1.50
	Contribution Margin Per MH	12.00	13.00	16.00
	Ranking	III	II	I
	As per Ranking, Utilization of 6000 MH Available:
	Particulars		Units	MH	Total MH
	Product 1	Produce on Resource	200	5.00	1000	(6000-3000-2000)=1000/5=200
	Product 2	Second Make	1000	2.00	2000
	Product 3	First Make	2000	1.50	3000
B	Particulars	Units	Contribution Margin	TotalContribution Margin
	Product 1	200	60.00	12000
	Product 2	1000	26.00	26000
	Product 3	2000	24.00	48000
			Total	86000
C	Since Product 3 & 2 are completely manufactured, additional resources are needed for Product 1
	Total Demand for Product 1	500
	Less: Manuafctured with Available Resources	200
	To be Manuafactured from additional Resources	300
	Contribution Margin PU	60.00
	Contribution Margin Generated Per Year	18000
	Years	3
	Contribution Margin Generated for 3 Years	54000
	Additional Machine Cost	55000
	Loss	-1000
	The Purchase will result in Loss of 1000/- So Company should not purchased