Question

Chef Gourmet, Inc., has assembled the following data pertaining to its two most popular products.

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $33. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

1.	If 56,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?

	Blender			Food Processor
Direct material	$	21		$	35
Direct labor		15			28
Manufacturing overhead @ $44 per machine hour		44			88
Cost if purchased from an outside supplier		63			108
Annual demand (units)		23,000			34,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $33. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1.	If 56,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased? Blender Food Processor Manufacture Purchase

2.	With all other things constant, if management is able to reduce the direct material for a food processor to $21 per unit, how many units of each product should be manufactured? Purchased?

	Blender Food Processor Manufacture Purchase

       

Answer 1

Req 1.
				Blenderr	Food Proc.
Savings in cost due to manujfacture				63	108
Less: Variable cost per unit
Material				21	35
Labouor				15	28
Variable OH				11	22
Contribution margin per unit				16	23
Divide: MH per unit				1	2
Contribution margin per MH				16	11.5
Ranking				I	II
Maximum demand				23000	34000
Total reequired MH				23000	68000	91000
Less: Available MH						56000
Shortage of MH to be adjusted in FP					-35000	-35000
MH to be utilized n each product				23000	33000
Divide: MH per unit				1	2
Number of units to be produced				23000	16500
Number of Units to be purchased					17500
					(34000-16500)
		Blender	Food Processor
manufacture units		23000	16500
purchase units		0	17500
Req 2:
				Blenderr	Food Proc.
Savings in cost due to manujfacture				63	108
Less: Variable cost per unit
Material				21	21
Labouor				15	28
Variable OH				11	22
Contribution margin per unit				16	37
Divide: MH per unit				1	2
Contribution margin per MH				16	18.5
Ranking				II	I
Maximum demand				23000	34000
Total reequired MH				23000	68000	91000
Less: Available MH						56000
Shortage of MH to be adjusted first in Blender				-23000	-12000	-35000
MH to be utilized n each product				0	56000
Divide: MH per unit				1	2
Number of units to be produced				0	28000
Number of Units to be purchased				23000	6000
					(34000-28000)
		Blender	Food Processor
manufacture units		0	28000
purchase units		23000	6000