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			$	132				$	160
Variable costs per unit				50					96
Contribution margin per unit			$	82				$	64
Machine hours to produce 1 unit		0.4	hours				1.0	hours
Maximum unit sales per month		600	units				150	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 $8,000 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 $82.00 $64.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $205.00 $64.00 Product G Product B Total Maximum number of units to be sold 600 150 Hours required to produce maximum units 160 150 310 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 176 176 Units produced for most profitable sales mix 440 Contribution margin per unit $82.00 Total contribution margin - one shift $36,080 $36,080 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 160 160 Units produced for most profitable sales mix 600 Contribution margin per unit $82.00 Total contribution margin - two shifts $49,200 4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $7,000 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. The hours required to produce maximum units is (600 x 0.4) = 240 hours and not 160 as has been shown. Hence, total hours required to produce maximum units is also (240 + 150) = 390 and not 310.

2. Is correct.

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	$         82.00	$       64.00
Total contribution margin-two shifts	$       49,200	$       7,168	$       56,368
Total contribution margin-one shift	$       36,080		$       36,080
Incremental contribution margin			$       20,288
Incremental fixed costs			$         8,000
Incremental operating income (loss)			$       12,288
Should company add another shift?	Yes

*Total hours = 8 hours x 22 days x 2 shifts = 352

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	$         82.00	$       64.00
Total contribution margin-two shifts and marketing campaign	$       57,400	$       4,608	$       62,008
Total contribution margin-two shifts	$       49,200	$       7,168	$       56,368
Incremental contribution margin	$         8,200	$     -2,560	$         5,640
Incremental marketing costs			$         7,000
Incremental fixed costs			$         8,000
Incremental operating income (loss)			$        -9,360
Should company pursue this strategy?	No