Question

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

	Blender				Electric Mixer
Direct material	$	17			$	26
Direct labor		10				38
Manufacturing overhead @ $44 per machine hour		44				88
Cost if purchased from an outside supplier		64				132
Annual demand (units)		33,000				38,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $22. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

If 70,000 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 $17 per unit, how many units of each product should be manufactured? Purchased?

If 70,000 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 33,000 18,500 Purchase 0

With all other things constant, if management is able to reduce the direct material for an electric mixer to $17 per unit, how many units of each product should be manufactured? Purchased?

	Blender Electric Mixer Manufacture 0 Purchase

Answer 1

1)

	Bleder	Electric Mixer
Price	64	132
less:variable cost
Direct material	(17)	(26)
direct labor	(10)	(38)
variable overhead	(22)    [44-22fixed)	(44)    [88-(22*2)fixed]
contribution margin per unit	15	24
machine hour per unit	44/44 =1	88/44=2
contribution pER HOUR	15/1= $15	24/2 =$ 12
Ranking	1	2

	Blender	Electric
Manufacture	33000 units    [33000*1 =33000MH used]	18500 units     [37000/2]
purchase	0	38000-18500= 19500

  **machine hours available after manufacturing of blender = 70000-33000 = 37000 hours

2)

	Bleder	Electric Mixer
Price	64	132
less:variable cost
Direct material	(17)	(17)
direct labor	(10)	(38)
variable overhead	(22)    [44-22fixed)	(44)    [88-(22*2)fixed]
contribution margin per unit	15	33
machine hour per unit	44/44 =1	88/44=2
contribution pER HOUR	15/1= $15	33/2 =$ 16.5
Ranking	2	1

	Blender	Electric mixer
Manufacture	0	35000 [70000hours /2 per unit ]
Purchase	33000	38000-35000= 3000