Question

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 $ 170 $ 200 Variable costs per unit 70 120 Contribution margin per unit $ 100 $ 80 Machine hours to produce 1 unit 0.4 hours 1.0 hours Maximum unit sales per month 550 units 200 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 $10,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Answer 1

Number of machine hours available from a single shift = 22 days x 8 hours = 176 machine hours.

	Product G	Product B
Contribution Margin per Unit	$ 100	$ 80
Machine hours to produce one unit	0.40	1.00
Contribution margin per machine hour	$ 250	$ 80

Since machine hours is a constrained resource, the product with the higher contribution margin per machine hour should be prioritised for maximum profit. In this case, Product G should be given priority over Product B.

	Product G	Product B
Number of units that will be produced, given the limiting factor	440 ( 176/ 0.40)	0
Contribution margin per unit	$ 100	$ 80
Total contribution margin	$ 44,000	$ 0

Therefore, working on a single shift, the maximum contribution margin that can be achieved is $ 44,000.

Now let us analyse whether is makes financial sense to work double shift.

Number of machine hours available from double shift = 176 x 2 = 352 machine hours.

	Product G	Product B	Total
Units Produced	550	132
Contribution margin per unit	$ 100	$ 80
Total contribution margin	$ 55,000	$ 10,560	$ 65,560
Less: Additional Fixed Costs			(10,000)
Net contribution margin			$ 55,560

By going for additional shift, operating income increases by $ ( 55,560 - 44,000) = $ 11,560.

Therefore, it makes sense to operate the machine for two shifts.