Question

Canadian Paper Inc. produces table napkins and facial tissues. The manufacturing process is highly mechanized. Both products are produced by the same machinery by using different settings. For the coming period, 200,000 machine hours are available. Management is trying to decide on the quantities of each product to produce. The following data are available (for table napkins, one unit is one package of napkins; for facial tissue, one unit is one box of tissue):

                                                Napkins                       Tissue

Machine hours per unit           1.00                             .50

Unit selling price                    $2.50                           $3.00

Unit variable cost                    $1.50                           $2.25

The company can sell no more than 150,000 packages of napkins and 300,000 boxes of tissue.

Required:

1. Determine the number of packages of napkins and the number of boxes of tissue the company should produce.

Compute the corresponding profit assuming that total fixed costs are $125,000. (4 Marks

Answer 1

Answer)

Particulars	Facial Tissues	Table Napkins	Total
Machine hours required per unit (a)	1.00	0.50
Maximum demand   (b)	300000	150000
Total machine hours required	300,000	75,000	375,000

Total machine hour required to meet maximum demand are 375,000. Whereas machine hours available are 200,000. Since total requirement of machine hours is less than its availability, machine hours becomes the limiting factor or Key factor. Hence, firstly maximum demand of that product should be produced which provides highest contribution margin per machine hour and balance machine hours should be utilized in production of other product.

Calculation of contribution margin per machine hour

Particulars	Facial Tissues	Table Napkins
Unit Selling Price	$ 2.50	$ 3.00
Less: Unit Variable cost	$ 1.50	$ 2.25
Unit Contribution margin (a)	$ 1.00	$ 0.75
Machine hours per unit (b)	$ 1.00	$ 0.50
Contribution margin per machine hour (a)/ (b)	$ 1.00	$ 1.50

It is evident from the perusal of above table that table napkins provide higher contribution margin per machine hours. Therefore, firstly maximum demand of Table napkins should be met and balance resources (machine hours) should be utilized in production of Facial tissues in order to maximize overall profit.

Calculation of number of units to be produced each product and profit at that production level

Name of Product	(A)	(B)	(A) x (B)	(C)	(A) x (C )
	Units Produced	Machine hour required per unit	Machine hours Consumed	Contribution per unit	Total Contribution
Table Napkins	150,000	$ 0.50	75,000	$ 0.75	$ 112,500
Facial Tissues	125,000	$ 1.00	125,000	$ 1.00	$ 125,000
Total			200,000		$ 237,500
Less: Fixed Cost					$ 125,000
Net Profit					$ 112,500

Decision: The Company should produce 150,000 packages of Table Napkins and 125,000 boxes of tissue papers in order or maximize profit. The profit at this level will be $ 112,500.