In: Accounting
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 | $ | 200 | $ | 230 | |||||||
Variable costs per unit | 85 | 138 | |||||||||
Contribution margin per unit | $ | 115 | $ | 92 | |||||||
Machine hours to produce 1 unit | 0.4 | hours | 1.0 | hours | |||||||
Maximum unit sales per month | 650 | units | 250 | 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 $11,500 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 contibution 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 | 650 | 250 | |
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- two shifts | |||
4. Suppose that the company determines that it can increase Product G's maximium sales to 700 units per month by spending $10,500 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 | |||
(Yes/No) |
Answer 1 | |||||
Determine the contibution margin per machine hour that each product generates | |||||
Product G | Product B | ||||
Contribution Margin per unit | $115.00 | $92.00 | |||
Contribution Margin per machine hour | $287.50 | $92.00 | |||
Product G | Product B | Total | |||
Maximum Number of Units to be Sold | 650 | 250 | |||
Hours required to produce maximum units | 260 | 250 | 510 | ||
Answer 2 | |||||
Product G | Product B | Total | |||
Hours Dedicated to the production of each product | 176 | 0 | 176 | ||
Units produced for most profitable sales mix | 440 | 0 | |||
Contribution Margin per unit | $115.00 | $92.00 | |||
Total contribution margin- one shift | $50,600.00 | $0.00 | $50,600.00 | ||
Answer 3 | |||||
Product G | Product B | Total | |||
Hours Dedicated to the production of each product | 260 | 92 | 352 | ||
Units produced for most profitable sales mix | 650 | 92 | |||
Contribution Margin per unit | $115.00 | $92.00 | |||
Total contribution margin- Two shifts | $74,750.00 | $8,464.00 | $83,214.00 | ||
Less : Additional Fixed cost | $11,500.00 | ||||
Operating Profit | $71,714.00 | ||||
Answer 4 | |||||
Product G | Product B | Total | |||
Hours Dedicated to the production of each product | 280 | 72 | |||
Units produced for most profitable sales mix | 700 | 72 | |||
Contribution Margin per unit | $115.00 | $92.00 | |||
Total contribution margin- Two shifts and Marketing Campaign | $80,500.00 | $6,624.00 | $87,124.00 | ||
Less : Additional Fixed cost and Marketing expense | $22,000.00 | ||||
Operating Profit | $65,124.00 | ||||
Company should not pursue this marketing strategy as it leads to fall in monthly operating profit by $6590 | |||||