Question

Mickey Company manufactures three different sizes of stuffed teddy bears (large, small and medium d corresponding costs for the month of January 2004 are given below: large medium small projected unit sales 3,000 5,000 4,000 $ $ $ price per unit 40 30 20 variable cost per unit --direct material 12 10 8 --direct labour 8 5 3 --support costs 5 3 2 fixed cost per unit 2 2 2 total unit cost 27 20 15 It takes 20, 15 and 10 machine hours to manufacture 100 units of large, medium and small teddy bears, respectively. The company has a monthly machine hour capacity of 2,050 machine hours and this machine hour capacity cannot be increased for at least a year. Required: b) Determine how many units Mickey Company should produce of each size to maximise its profits c) Suppose that a foreign firm has offered to buy 2,000 large teddy bears at $45 each. Determine the opportunity costs for this order. d) Suppose that the available machine hour capacity is reduced to 1,550 machine hours due to machine break down. How many units of each size should Mickey Company produce to maximise its profits?

Answer 1

b)

	Large	Medium	Small
Projected Sales (Units)	3000	5000	4000
Selling Price	40	30	20
Variable Cost:
Direct Material	(12)	(10)	(8)
Direct Labour	(8)	(5)	(3)
Support Costs (Considered as variable cost)	(5)	(3)	(2)
Contribution margin per unit	15	12	7
Machine Hours required per unit	0.2	0.15	0.1
Contribution margin per machine hour	75	80	70
Ranking for production	2nd	1st	3rd
Machine Hours required for projected sales	600	750	400
Machine Hours allocated	600	750	400
Units Produced	3000	5000	4000

Since total trequirement for machine hours is only 1750 and available machine hours is 2000, required no. of units can be produced.

c)

Surplus Capacity = 2000 - 1750 = 250 Machine Hours

Machine Hours required for producing additional 2000 large teddy bears = 2000 * 0.20 = 400 machine hours

Thus in order to produce additional 2000 large teddy bears, more 150 machine hours (400 - 250) will be required and thus production of small teddy bears is to be reduced by 150 machine hours.

Contribution margin foregone due to allocation of 150 machine hours for production of additional large teddy bears = 150 MH * 70 (CM per MH) = 10,500

Contribution foregone of $ 10,500 shall be opportunity cost for the order

d)

	Large	Medium	Small
Contribution margin per unit	15	12	7
Machine Hours required per unit	0.2	0.15	0.1
Contribution margin per machine hour	75	80	70
Ranking for production	2nd	1st	3rd
Machine Hours required for projected sales	600	750	400
Machine Hours allocated (based on rankings)	600	750	100
Units Produced	3000	5000	1000