Short Inc has 6,000 machine hours available each month. The following information on the company's three...

Short Inc has 6,000 machine hours available each month. The following information on the company's three products is available:

	Product 1		Product 2		Product 3
Selling price	$	90.00		80.00		50.00
Variable cost per unit		30.00		54.00	$	26.00
Machine hours per unit		5		2		1.5
Sales demand in units		500		1,000		2,000

Required:
a. What production schedule will maximize the company's profits?

b. What will be the maximum possible contribution margin?

c. The company has an option of buying an additional machine for $55,000 to increase the total machine hours to 8,000. Assuming that this machine will last for 3 years and have no resale value at the end of its life, should the company buy this machine?

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Expert Solution

	Product 1	Product 2	Product 3
Selling Price per Unit	$ 90	$ 80	$ 50
Variable Cost per Unit	30	54	26
Contribution Margin per Unit	$ 60	$ 26	$ 24
Machine Hours per Unit	5	2	1.5
Contribution Margin per Machine Hour	$ 12	$ 13	$ 16
Rank	3	2	1

Production Schedule:

Total Machine Hours	6,000
Less : Utilized for total sales demand of Product 3 ( 2,000 x 1.5)	(3,000)
Less: Utilized for total sales demand of Product 2 ( 1,000 x 2)	(2,000)
Remaining Machine Hours for Product 1	1,000
Number of units of Product 1 than can be produced ( 1,000 MH / 5 MH per unit)	200

Product 1 : 200 units, Product 2 : 1,000 units, Product 3 : 2,000 units.

b. Maximum possible contribution margin per month = 2,000 x $ 24 + 1,000 x $ 26 + 200 x $ 60 = $ 86,000.

c. Contribution margin per month after enhanced capacity = 2,000 x $ 24 + 1,000 x $ 26 + 500 x $ 60 = $ 104,000.

Increase in contribution margin per month = $ 104,000 - $ 86,000 = $ 18,000.

Additional fixed cost ( depreciation on new equipment) = $ 55,000 / 36 months = $ 1,528.

Increase in operating income after purchase of equipment = $ 18,000 - $ 1,528 = $ 16,472 per month.

Therefore, the company should buy the machine, as that would result in increased operating income of $ 16,472 per month. Moreover, it would ensure that the company isable to cater to the total demand for each of its products, as the resource constraint ( Machine Hours) will be taken care of .

ekkarill92 answered 1 year ago

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