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 $ 50 $ 80 Variable costs per unit 10 48 Contribution margin per unit $ 40 $ 32 Machine hours to produce 1 unit 0.4 hours 1.0 hours Maximum unit sales per month 600 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 $4,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Answer 1

Answer)

Calculation of machine hours requirement and availability in single shift

	Product G	Product B	Total
Machine hours required per unit (A)	1.00	0.40
Maximum sales per month    (B)	600	200
Total machine hours Required (A) X (B)	600	80	680
Presently available total machine hours in single shift (8 hours X 22 days)			176

From the perusal of above table, it is evident that in a single shift, machine hours required (i.e. 680 machine hours) is greater than its availability (i.e. 176 machine hours). Thus the company will not be able to fulfill the maximum demand of each product in single shift working and machine hours is the limiting factor.

Therefore the maximum possible demand of that product should be fulfilled first which provides higher contribution margin per machine hour.

Statement of Ranking

	Product G	Product B	Total
Selling price per unit	$50	$80
Less: Variable cost per unit	$10	$48
Contribution margin per unit (A)	$40	$32
Machine hours required per unit (B)	1.00	0.40
Contribution per machine hour (A)/ (B)	$40	$80
Ranking	II	I

Since the contribution margin per machine hour of Product B (i.e. $ 80) is higher than that of Product G (i.e. $ 40), maximum possible units of Product B should be first produced and balance machine hours should be utilized in manufacture of product G in order to maximize contribution.

Statement of Optimum product mix (Single shift)

	Product G	Product B	Total
Machine hours required per unit    (A)	1.00	0.40
Ranking	II	I
Number of Units Produced as per Ranking   (B)	96	200
Machine hours utilized   (A) X (B)	96	80	176

The company is able to produce its maximum sales potential 200 units of product B. However, only96 units out of total demand of 600 units of Product G is being manufactured in single shift.

If the company opts for second shift, additional 176 machine hours will be available (i.e. 22 hours per day X 22 days). In these 176 hours, it will be able to produce additional 176 units (in addition to 96 units produced in single shift). Thus contribution margin of these 176 units of product G should be compared with additional fixed cost (i.e. $ 4,000) to arrive at conclusion.

Statement of Cost benefit

	Amount
Additional Contribution Margin in second shift (176 machine hours)
Product G: (176 machine hours X $ 40 per machine hour)	$7,040
Less: Increase in fixed cost	$4,000
Increase in Net operating income	$3,040

Decision: From the perusal of above table, it is clear that additional contribution margin from manufacture of additional 176 units Product G is sufficient to cover additional fixed cost of $ 4,000 and thus the net operating income of the company will increase by $ 3,040. Thus it is advisable that the company should opt for second shift working.