Question

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

	Blender			Food Processor
Direct material	$	24		$	41
Direct labor		18			31
Manufacturing overhead @ $50 per machine hour		50			100
Cost if purchased from an outside supplier		66			114
Annual demand (units)		26,000			30,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $36. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1.	If 51,000 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 $24 per unit, how many units of each product should be manufactured? Purchased?

	Blender	Food Processor
Manufacture
Purchase

Answer 1

Solution 1:

Time required per unit in Blender = Manufacturing overhead per unit / Manufacturing overhead per machine hour = $50 / $50 = 1 Machine hour

Time required per unit in Food Processor = $100 / 50 = 2 machine hour per unit

Computation of saving per machine hour of making the product - Chef Gourmet, Inc.
Particulars	Blendor	Food Processor
Cost of Purchase	$66.00	$114.00
Variable cost to make:	$55.00	$85.00
Direct Material	$24.00	$41.00
Direct labor	$18.00	$31.00
Variable manufacturing overhead	$14.00	$28.00
Total variable manufacturing cost	$56.00	$100.00
Contribution per unit from making	$10.00	$14.00
Machine hour per unit	1.00	2.00
Saving per machine hour of making	$10.00	$7.00

As cost saving per machine hour is higher for blender, therefore available machine hours first utilized for making blender then utilize for making Food processor

Therefore number of blender to be manufactured = Annual demand = 26000 units

Number of blender to be purchased = Nil

Number of food processor to be manufactured = (51000 - 26000) / 2 = 12500 food processor

Nos of food processor to be purchased = Annual demand - Food processor manufactured = 30000 - 12500 = 17500 food processor

Solution 2:

Computation of saving per machine hour of making the product - Chef Gourmet, Inc.
Particulars	Blendor	Food Processor
Cost of Purchase	$66.00	$114.00
Variable cost to make:	$55.00	$85.00
Direct Material	$24.00	$24.00
Direct labor	$18.00	$31.00
Variable manufacturing overhead	$14.00	$28.00
Total variable manufacturing cost	$56.00	$83.00
Contribution per unit from making	$10.00	$31.00
Machine hour per unit	1.00	2.00
Saving per machine hour of making	$10.00	$15.50

As cost saving per machine hour is higher for food processor, therefore available machine hours first utilized for making food processor then utilize for making blendor

Therefore number of food processor to be manufactured = 51000/2 = 25500

Number of food processor to be purchased = 30000 - 25500 = 4500 food processor

Number of Blendor to be manufactured = Nil

Nos of Blendor to be purchased = Annual demand = 26000 Blendor