Question

Holton Company makes three products in a single facility. Data concerning these products follow: Product A B C Selling price per unit $ 137.10 $ 74.80 $ 167.60 Direct materials $ 59.70 $ 41.70 $ 100.70 Direct labor $ 43.00 $ 13.30 $ 29.50 Variable manufacturing overhead $ 8.20 $ 4.30 $ 13.80 Variable selling cost per unit $ 15.20 $ 3.10 $ 8.50 Mixing minutes per unit 26.90 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 Mixing machine time required = 3000*26.9 + 2000*2+1000*2
86700	Minutes
The products should be produced on the basis of contribution margin per minute of mixing machine
	A	B	C
Selling price	137.1	74.8	167.6
Variable costs
Direct material	59.7	41.7	100.7
Direct Labor	43	13.3	29.5
Variable manufacturing overhead	8.2	4.3	13.8
Variable selling cost	15.2	3.1	8.5
Contribution Margin per Unit	11	12.4	15.1
Milling machine minutes per unit	26.9	2	2
Contribution Margin per Minute	0.409	6.2	7.55
Production Schedule
Product	Units	Minutes per unit	Total Minutes
A	297.4	26.9	8000
B	2000	2	4000
C	1000	2	2000
		Total	14000
c.Amount per additional hour = Contribution margin = 0.409*60 = $24.54
As additional hour will be used to produce A