Question

Power Scru, LLC produce three different Models of power washer. A Limitation of 2000 machine hours associated with equipment necessary for making a key component of all three models of the power washers prevents Power Scrub from meeting the sales demand for all of its power washers. The Three are Economy Electric, Big Job Electric and a Commercial Gasoline Model

The Following information pertains to tower Scrubs three models of power washers

	Economy	Big Job	Commercial
Units Selling Price	$140	$220	$400
Units Variable Costs	$96	$140	$260
Machine hours per Unit	0.2	0.4	0.5
Maximum annual Demand	2000 Units	5000 Units

1. What is the Recommended Product Mix to Maximize profit in the Short Run ?

2. What is the total contribution Margin at the Product Mix your recommended ?

3. What strategic/Qualitative Factors should power scrub Consider in reaching their Decision ?

Answer 1

1.)Here Machine hours are the limiting factor so we have to consider contribution per machine hour as an essential criteria for arriving at our decision

	Economy	Big job	Commercial
a)sale value per unit	140	220	400
b)variable cost per unit	96	140	260
c)contribution per unit	44	80	140
d) Machine hr per unit	0.2	0.4	0.5
e) contribution per Machine hour(c/d)	$220	$200	$280

Since contribution per machine hour is more in Commercial power washer it is beneficial to produce maximum units of it

In the given question they have not specified maximum annual demand of Commercial power washer so product mix cannot be determined

If we assume it as 3000 units then

Total hours required for producing 3000 units of Commercial power washer is 0.5*3000 = 1500

Balance 500 hrs (2000-1500) will be spend on production of Economy because it gives next highest contribution

So the product mix assuming maximum demand of 3000 units for Commercial power washer is

Commercial power washer = 3000units

Economy power washer = 500units

Big job power washer = 0

2.) Total contribution margin at product mix so recommened assuming maximum demand of 3000 units for Commercial power washer is

Commercial power washer = 1500 hrs*$280 = $420000

Economy power washer    =   500 hrs*$220 = $110000

Total                                  =   $530000

3.) Here Machine hours are the limiting factor so we have to consider contribution per machine hour as an essential criteria for arriving at our decision accordingly we have to find out contribution per machine hour and the product having maximum contribution per machine hour is to be produced to the maximum of its annual demand