Question

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

	Blender				Electric Mixer
Direct material	$	21			$	30
Direct labor		14				42
Manufacturing overhead @ $52 per machine hour		52				104
Cost if purchased from an outside supplier		71				140
Annual demand (units)		37,000				46,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $26. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

If 78,000 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?

With all other things constant, if management is able to reduce the direct material for an electric mixer to $21 per unit, how many units of each product should be manufactured? Purchased?

Answer 1

Req 1
				Blender	Mixer
Savings in cost if manufactured inside				71	140
Less: Cost of manufacture-Vvariable
Material				21	30
labour				14	42
Variable manufacturing overheads				26	52
Contribution margin per unit				10	16
Divide: Machine hour per unit				1	2
				(52/52)	104/52)
Contribution margin per MH				10	8
Ranking				I	II
Total Machine hours					78,000
Less: Hours used in Blender (37000 units @1 hr)					37,000
Machne hours available for Mixer					41,000
Uunits that can be produced of Mixer					20,500
		(41000 hours / 2 hours)
Units of Mixer to be bought (46000-20500)					25,500
			Blender	Mixer
Units to be produced			37,000	20,500
Units to be purchase				25500
Req 2:
				Blender	Mixer
Savings in cost if manufactured inside				71	140
Less: Cost of manufacture-Vvariable
Material				21	21
labour				14	42
Variable manufacturing overheads				26	52
Contribution margin per unit				10	25
Divide: Machine hour per unit				1	2
				(52/52)	104/52)
Contribution margin per MH				10	13
Ranking				II	I
Total Machine hours					78,000
Required hours fr 46000 units of Mixer @2 hours					92,000
Total Hours used in Mixer					78,000
Number of units produced of Mixer (78000/2)					37,000
Number of Units purchase of mixer (46000-37000)					9000
Number of Units purchase of Blender					37,000
			Blender	Mixer
Units to be produced				37,000
Units to be purchase			37,000	9000