Question

Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow.

	Basic			Classic			Formal
Sales price	$	38		$	70		$	200
Maximum annual demand (units)		18,000			11,000			28,000
Input requirement per unit
Direct material		0.7	yards		0.5	yards		0.8	yards
Direct labor		0.9	hours		2	hours		8	hours

Costs
Variable costs
Materials	$	18	per yard
Direct labor	$	14	per hour
Factory overhead	$	5	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	50,000
Marketing	$	7,500
Administration	$	44,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 35,500 direct labor-hours per year caused by the plant layout.

a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below

a-2. How much operating profit could the company earn if it were able to satisfy the annual demand?

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor.

b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?

c. Given the information in the problem so far, what product mix do you recommend?

d-1. Calculate the contribution margin for each type of dress shirt using the table below.

d-2. How much operating profit should your recommended product mix generate?

Need help with this last part,

e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 17,000 more hours. The direct labor cost would increase from $14 to $17 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?

Contribution margin per unit:

Additional labor cost at higher rate:

hours to produce one unit:

contribution margin per labor hour for extra cost:

new contribution margin per labor hour:

demand:

present production:

amount to produce on new shift:

Contribution margin per unit of new production:

Additional operating profit:

Answer 1

Answer :-

a-1 )

	Basic	Cassic	Formal
Sales price per unit	38	70	200
Less Variable costs per unit
Direct materials	12.60 (=0.70*18 per yard)	9 (=0.50*18)	14.40(=0.80*18)
Direct labour	12.60 (=0.9*14 per hour)	28 (=2*14)	112 (=8*14)
Variable factory Ohs	4.50(=0.9*5)	10 (=2*5)	40(=8*5)
Variable marketing exp (10% of sales price)	3.80	7.0	20
Contribution per unit	4.50	16	13.6
No. of units	18,000	11,000	28,000
Total contribution Margin	81,000	176,000	380,000

a-2 )

Total cntribution margin (81,000+176,000+380,000)	637,000
Less Fixed costs
Manufacturing	50,000
Marketing	7,500
Administration	44,000
Operating profit	535,500

b-1)

	Basic	Classic	Formal
Contribution margin per unit (from a-1)	4.50	16	13.6
Direct labour hours	0.9	2	8
Contribution margin per direct labour hour	$5	$8	$1.7

b-2) Classic product makes the most profitable use

C)

	Basic	Classic	Formal	Balance
Contribution margin per unit (from a-1)	4.50	16	13.6
Direct labour hours (a)	0.9	2	8
Contribution margin per direct labour hour	$5	$8	$1.7
Ranking	II	I	Ill
Total demand (b)	18,000units	11,000	28,000
Total hours required to meet demand (a*b)	16,200hrs	22,000 hrs	224,000 hrs
Hours for classic to be produced fully		22,000		13,500 (=35500-22000)
Balance hrs to produce basic (c)	13,500			0
Units produced (c/a)	15,000 units	11,000 units	-

Product Mix shall be 15,000 units of Basic, 11,000 units of Classic and 0 units of Formal

(d -1) Same as a-1, as the "table" is not given, this cannot be answered

(d-2) Contribution of basic = 15000 * 4.50= 67,500

Contribution of Classic = 11000 units * 16= 176000

Operating profit with this product mix= 67,500+176,000-50,000-7,500-44,000 = $142,000

(e) Additional 18000 hours

	Basic	Formal
Contribution margin per unit	4.50	13.60
Direct labour hours	0.9	8
Contribution margin per lb hr	5.00	1.70
Ranking	1	11
Units not met annual demand	3,000(18,000-15000)	28,000
Total hrs required to meet demand	2,700	380,000
Hours for basic to be produced fully	2,700	-
Balance hrs (16,200-2,700)		13,500
additional units produced	3,000units	994.73rounded to 995units

Contribution for additional units

	Basic	Formal
Sales price per unit	38	200
Less Variable costs per unit
Direct materials	12.60 (=0.7*18 per yard)	14.40(=0.8*18)
Direct labour	15.30(=0.9*17 per hour)	136(=8*17)
Variable factory Ohs	4.50(=0.9*5	40(=8*5)
Variable marketing exp (10% of sales price)	3.8	20
Contribution per unit	1.8	-10.40
Additional units to be produced	3,000	995
Total additional contribution	5,400	-10,348

Net operating profit = 535,500+5,400-10,348 = $530,552.