Question

Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products.

Direct material	$	26			$	45
Direct labor		20				33
Manufacturing overhead @ $54 per machine hour		54				108
Cost if purchased from an outside supplier		68				116
Annual demand (units)		28,000				34,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $42. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

If 60,000 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 Electric Mixer Manufacture 28,000 16,000 Purchase

With all other things constant, if management is able to reduce the direct material for an electric mixer to $26 per unit, how many units of each product should be manufactured? Purchased?

	Blender Electric Mixer Manufacture Purchase 28,000

Answer 1

Working Note 1
Statement showing no of manufacturing hours required per unit
	Blender	Electric Mixer
Manufacturing overhead @ $54 per machine hour	54	108
Required number hours per unit = 54/54, 108/54	1	2

Fixed manufacturing overhead is $42. Therefore variable component is 54-42 = $12 per machine hour

Here fixed cost is irrelevant for decision making. We need to consider only variable component for decision making.

Part A:

Statement showing benefit per manufacturing hour compared to purchasing from outside and priority to manufacture
	Blender	Electric Mixer
A. Direct material	26	45
B. Direct labor	20	33
C. Variable Manufacturing overhead @ $12 per machine hour 12*1,2	12	24
D. Total relevant cost if manufacture(A+B+C)	58	102
E. Cost if purchased from an outside supplier	68	116
F. Benefit of manufacturing inhouse (E-D)	10	14
G. Number of manufacturing hours required per unit (Working Note 1)	1	2
H. Benefit per manufacturing hour =F/G	10	7
Therefore Priority to manufacture inhouse	First	Second

Statement showing no of units to be manufactured and to be purchased
A. Annual demand (units) for Blender	28,000
B. Number of manufacturing hours required per unit of Blender	1
C. Number of manufacturing hours required for Blender=A*B	28000
D. Total manufacturing hours available	60000
E. Remaining manufacturing hours available for Electric Mixer= D-C	32000
F. Number of manufacturing hours required per unit of Electric Mixer	2
G. Number of units of Electric mixer that can be manufactured = E/F	16000
H. Total number of units of Electric mixer required to meet demand	34000
I. Number of units of Electric mixer to be purchased from outside=H-G	18000

Summary table:
	Blender	Electric Mixer
Manufacture	28,000	16,000
Purchase	0	18000

Part B:

Statement showing benift per manufacturing hour compared to purchasing from ouside and priority to manufacture If direct material for Electric mixer is reduced to $26 per unit
	Blender	Electric Mixer
A. Direct material	26	26
B. Direct labor	20	33
C. Variable Manufacturing overhead @ $12 per machine hour 12*1,2	12	24
D. Total relevant cost if manufacture(A+B+C)	58	83
E. Cost if purchased from an outside supplier	68	116
F. Benefit of manufacturing inhouse (E-D)	10	33
G. Number of manufacturing hours required per unit (Woring Note 1)	1	2
H. Benefit per manufacturing hour =F/G	10	16.5
Therefore Priority to manufacture inhouse	Second	First

Statement showing no of units to manufacured and to be purchased
A. Annual demand (units) for Electric Mixer	34,000
B. Number of manufacturing hours required per unit of Electric Mixer	2
C. Number of manufacturing hours required for Electric Mixer=A*B	68000
D. Total manufacturing hours available	60000
E. Defict manufacturing hours for Electric Mixer=C-D	8000
F. Number of units of Electric mixer to be purchased outside =E/B	4000
G. Number of unit of Electric mixer to be manufactured inhouse=A-F	30,000
F. So, Entire number of units of Blender to be purchased from outside	28000

Summary:
	Blender	Electric Mixer
Manufacture	0	30,000
Purchase	28000	4000