Question

TEXAS COMPANY

…… produces two models, Alpha and Gamma, using “Bob”, a new manufacturing process. Information regarding Alpha and Gamma is summarized in the following table:

	ALPHA	GAMMA
Price per unit	$80	$60
Variable cost per unit	$50	$30
Amount of BOB processing time required per unit	6 hours	2 hours

BOB can only be used for 120 hours per week. The Company has fixed costs of $720 per week.

Required:

1. Given the data above, assuming that there is no limit on the demand and that they can produce as much of either product as they wish, they should produce how much of each product?

2. A new attachment is available that will increase the capacity of Bob by an additional 20 hours per week. The part has a useful life of 4 weeks, after which it must be replaced. What is the maximum that they would be willing to pay for this new attachment? Why?

3. Assume the original 120 hour limit, but that there is a limited demand of 30 units of Gamma per week and 15 units of Alpha per week. How much of Alpha and Gamma should they produce?

4. The company has a contract with a customer who has a standing order for 11 units of Alpha per week which must be produced regardless. How much of each product should WALSH produce?

5. Assume the original situation (that they can produce as much or little of either product as they wish), and that they have chosen to produce ALL Gamma. Furthermore, assume that the company is operating at full capacity. MARKOFF CORP. has approached the company and wishes to place an order for 5 units of Alpha. What is the minimum amount that they should charge? Why?

Answer 1

		ALPHA	GAMMA
A	Price per unit	$80	$60
B	Variable cost per unit	$50	$30
C	Contribution=A-B	$30	$30
D	Amount of BOB processing time required per unit	6	2
E	Contribution per BOB processing hour=C/D	5	15
F	Priority	Second	First

BOB can be used for 120 hours per week

Fixed cost $720 per week

1.

Assumption is that there is no limit on the demand and that they can produce as much of either product as they wish.

As GAMMA product has more contribution per hour of bob processing which is a limited resource of 120 hours per week, it should produce GAMMA as many as possible.

Statement showing number of units of each product to be produced in case of unlimited demand for each product.
A	BOB processing hours required per unit of GMMA	2
B	Available BOB processing hours	120
C	Number of units of GAMMA possible per week=B/A	60

So, they should produce 60 units of GAMMA per week and zero units of ALPHA

2.

A new attachment is available that will increase the capacity of Bob by an additional 20 hours per week.

20 hours can give highest contribution of $15 per hour. That means 20hours* $15= $300 per week.

As the part is having 4 weeks life, it can provide a contribution of 300*4= $1200.

Maximum price that they would be willing to pay for this new attachment is $1200 since it can earn an additional contribution of $1200 in its useful life of 4 weeks.

3.

Assumption is the original 120 hour limit, but that there is a limited demand of 30 units of Gamma per week and 15 units of Alpha per week.

Statement showing Alpha and Gamma should be produced if there is a limited demand of 30 units of GAMMA and 15 units of ALPHA per week
A	Total available hours per week	120
B	Hours required for 30 units of GAMMA which is having high contribution per hour= 30 units*2 hours	60
C	Remaining available hours for ALPHA=A-B	60
D	Number of hours required to produce ALPHA	6
E	Number of units possible for ALPHA=C/D	10

Number of units of GAMMA = 30 units.

Number of units of ALPHA = 10 units.

4.

The company has a contract with a customer who has a standing order for 11 units of Alpha per week which must be produced regardless.

Statement showing number of units of each product to be produced assuming that the company has a contract with a customer who has a standing order for 11 units of Alpha per week which must be produced regardless
A	Number of hours available per week	120
B	Number of hours required for 11 units of ALPHA= 11units*6hours	66
C	Number of hours remaining for GAMMA=A-B	54
D	Number of hours required per unit of GAMMA	2
E	Number of units of GAMMA possible=C/D	27

Number of units of ALPHA = 11 units.

Number of units of GAMMA = 27 units.

5.

Assume the original situation (that they can produce as much or little of either product as they wish), and that they have chosen to produce ALL Gamma. Furthermore, assume that the company is operating at full capacity. MARKOFF CORP. has approached the company and wishes to place an order for 5 units of Alpha.

Statement showing amount to e charged for MARKOFF CORP for ALPHA
A	Hours required per unit of ALPHA	6
B	Units of ALPHA to be produced for MARKOFFCORP	5
C	Number of hours required to produce 5 units=A*B	30
D	Highest contribution possible per hour if produce GAMMA	15
E	Total contribution foregone by producing ALPHA=D*C	450
F	Variable cost per unit of ALPHA	50
G	Total variable cost for 5 units=F*B	250
H	Minimum amount they should charge for 5 units=E+G	700
I	Minimum amount per unit of ALPHA to be charged=H/B	140