Question

Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.

	Product G					Product B
Selling price per unit			$	240				$	270
Variable costs per unit				105					162
Contribution margin per unit			$	135				$	108
Machine hours to produce 1 unit		0.4	hours				1.0	hours
Maximum unit sales per month		650	units				250	units

The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $13,500 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit $135.00 $108.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $337.50 $108.00 Product G Product B Total Maximum number of units to be sold 650 250 Hours required to produce maximum units 260 250 510 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product 176 0 176 Units produced for most profitable sales mix 0 Contribution margin per unit $135.00 $0.00 Total contribution margin - one shift $0 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total incremental income would this mix produce each month? Should the company add the new shift? Product G Product B Total Hours dedicated to the production of each product 260 260 Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts Total incremental income 4. Suppose the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $12,500 per month in marketing efforts. Should the company pursue this strategy and the double shift? Compute total incremental income. Product G Product B Total Second shift without marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $0 $0 Second shift with marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $0 $0

Answer 1

Answer)

	1. Determine the contribution margin per machine hour that each product generates.

	Product G		Product B
Contribution margin per unit	$135.00		$108.00
Machine hours per unit	0.4		1.0
Contribution margin per machine hour	$337.50		$108.00
	Product G		Product B	Total
Maximum number of units to be sold	650		250
Hours required to produce maximum units	260		250	510
2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month?
	Product G		Product B	Total
Hours dedicated to the production of each product	176		0	176
Units produced for most profitable sales mix	510		0
Contribution margin per unit	$135.00		$0.00
Total contribution margin - one shift	$68,850			$68,850
3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total incremental income would this mix produce each month? Should the company add the new shift?
	Product G		Product B	Total
Hours dedicated to the production of each product	260		92	352
Units produced for most profitable sales mix	650		92
Contribution margin per unit	$135		$108
Total contribution margin - two shifts	$87,750		$9936	$97686
Total contribution margin- one shift				68850
Change in contribution margin				28836
Change in fixed costs				13500
Total incremental income(profit)				15336
Should the company add another shift	yes
4. Suppose the company determines that it can increase Product G’s maximum sales to 700 units per month by spending $12,500 per month in marketing efforts. Should the company pursue this strategy and the double shift? Compute total incremental income.
	Product G		Product B	Total
Second shift without marketing campaign:	280		112	352
Units produced for most profitable sales mix	700		112
Contribution margin per unit	135		108
Contribution margin	$94500		$12096	10659.6
Contribution margin-two shift without marketing campaign				97686
Change in contribution margin				8910
Additional marketing cost				12500
Change in fixed costs				13500
Total incremental income (loss)				(17090)
Should the company add another shift	No