Question

Holton Company makes three products in a single facility. Data concerning these products follow:

	Product
	A		B		C
Selling price per unit	$	91.60	$	78.20	$	125.10
Direct materials	$	39.90	$	43.60	$	75.20
Direct labor	$	28.80	$	13.90	$	20.10
Variable manufacturing overhead	$	5.60	$	4.60	$	9.40
Variable selling cost per unit	$	8.70	$	3.30	$	5.80
Mixing minutes per unit		15.40		2.00		2.00
Monthly demand in units		3,000		1,000		2,000

The mixing machines are potentially the constraint in the production facility. A total of 14,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

a. How many minutes of mixing machine time would be required to satisfy demand for all three products?

b. How much of each product should be produced to maximize net operating income?

c. Up to how much should the company be willing to pay for one additional hour of mixing machine time if the company has made the best use of the existing mixing machine capacity?

Answer 1

a)   Total minutes of mixing machine time would be required to satisfy demand for all three products

	Minutes
Minutes required to produce 3000 units of A (3000 x 15.40)	46,200
Minutes required to produce 1000 units of B (1000 x 2)	2,000
Minutes Required to produce 2000 units of C (2000 x 2)	4,000
Total minutes required to satisfy demand of all the three products	52,200

b. How much of each product should be produced to maximize net operating income

Product	A		B		C
Selling price per unit (a)		$ 91.60		$ 78.20		$ 125.10
Direct Material	$ 39.90		$ 43.60		$ 75.20
Direct Labour	$ 28.80		$ 13.90		$ 20.10
Variable Manufacturing overhead	$ 5.60		$   4.60		$ 9.40
Variable selling cost per unit	$ 8.70		$   3.30		$ 5.80
Total variable cost per unit (b)		$ 83.00		$ 65.40		$ 110.50
Contribution Per Unit (c) = a - b		$ 8.60		$ 12.80		$   14.60
Mixing Minutes Per minute (d)		15.40		2		2
Contribution per mixing minute = c / d		$ 0.56		$6.40		$7.3
Ranking		3		2		1

	Minutes	units
Total Minutes available	14000
Minutes required to produce 2000 units of C (2000 x 2)	4000	2000
Balance	10000
Minutes required to produce 1000 units of B (1000 x 2)	2000	1000
Balance	8000
Number of units of A that could be produced (8000 / 15.40)		520

Hence ,   520 units of A, 1000 units of B and 2000 units of C should be produced to maximize net operating income.

c).

Company is willing to pay Maximum payment for an additional hour is equal to (Contribution Margin per mixing minute for A x 60 minutes). As only for A more minutes are required

Maximum payment that could be made by the company for an additional hour
        = (Contribution Margin per mixing minute for A x 60 minutes)
        = (Contribution Margin per unit / Minutes per unit) x 60 minutes
       = ($8.60/ 15.4) x 60
       = $33.51 per hour