Question

Problem 23-5A Analysis of sales mix strategies LO A1

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

	Product G					Product B
Selling price per unit			$	132				$	160
Variable costs per unit				50					96
Contribution margin per unit			$	82				$	64
Machine hours to produce 1 unit		0.4	hours				1.0	hours
Maximum unit sales per month		600	units				150	units

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $8,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit Contribution margin per machine hour Product G Product B Total Maximum number of units to be sold 600 150 Hours required to produce maximum units 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - one shift 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts 4. Suppose that the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $7,000 per month in marketing efforts. Should the company pursue this strategy and the double shift? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts and marketing campaign

Answer 1

• All working forms part of the answer
• Product with ‘maximum’ or highest contribution margin per hour should be given preference to produce.
• Note:

Single shift = 8 hours x 22 days = 176 hours
Double shift = 176 hours x 2 = 352 hours

• Requirement 1

	Product G	Product B
Contribution margin per unit	$82	$64
Machine hours required per unit	0.4	1
Contribution margin per machine hour	$205	$64

	Product G	Product B	Total
Maximum number of units to be sold	600	150	750
Hours required to produce maximum units	[600 x 0.4] 240	[150 x 1] 150	390

• Requirement 2

Single shift total hours = 176 hours

	Product G	Product B	Total
Hours dedicated to the production of each product	176	0	176
Units produced for most profitable sales mix	[176/0.4] 440	0
Contribution margin per unit	$82	$64
Total contribution margin - one shift	$36,080	$0	$36,080

• Requirement 3

Double shift = 352 hours

	Product G	Product B	Total
Hours dedicated to the production of each product	240	112	352
Units produced for most profitable sales mix	[240/0.4] 600	[112/1] 112
Contribution margin per unit	$82	$64
Total contribution margin - two shifts	$49,200	$7,168	$56,368
(-) Additional Fixed Cost			$8,000
Net Benefit [total]			$48,368

• Requirement 4

	Product G	Product B	Total
Hours dedicated to the production of each product	[700units x 0.4] 280	[352 – 280] 72	352
Units produced for most profitable sales mix	700	72
Contribution margin per unit	$82	$64
Total contribution margin - two shifts and marketing campaign	$57,400	$4,608	$62,008
(-) Additional fixed cost for double shift			$8,000
(-) Amount spent for increasing 'G' sale			$7,000
Net Benefit			$47,008

NO, the company should not pursue this strategy as Net Benefit in Requirement 4 is less than Requirement 3. Hence, the company should just pursue the strategy of DOUBLE SHIFT only.