Question

Xenon Corp. makes three products in a single facility. These products have the following unit product costs:

                                                                     Product I                              Product II                Product III

Direct material                                                $39.25                         $34.60                         $37.25

Direct labor                                                     20.60                         17.95                         17.30

Variable manufacturing overhead                       5.30                             6.65                           10.65

Fixed manufacturing overhead                       34.60                           35.90                         30.60    

Unit cost                                                         $99.15                         $95.10                        $95.80

Additional data concerning these products are listed below:

                                                                     Product I                             Product II              Product III

Mixing minutes per unit                                     6.6                                4                         5.2

Selling price per unit                                      $133.00                    $121.70                   127.65

Variable selling cost per unit                           $9.30                         $6.70                    $8.00

Monthly demand in units                               2,395                         4,790                     4,125

The mixing machines are potentially the constraint in the production facility. A total of 40,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

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

2.    Using only the available 40,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Round down to the nearest whole units.)

3.    Is there unmet demand for product(s)? If so, how much and for which product(s)?

4.    Assume there is unmet product demand. How much in total should Xenon be willing to pay for extra machine time?

5.    Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

6.    Is there anything misleading about the figure given for fixed manufacturing overhead?

7.    What is the significance of contribution margins with respect to question 3?

8.    What is the significance of contribution margins with respect to question 5?

9.    Why isn’t sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?

Answer 1

		I	II	III
	Direct Material	39.25	34.60	37.25
	Direct Labor	20.60	17.95	17.30
	Variable manufacturing overhead	5.30	6.65	10.65
	Fixed manufacturing overhead	34.60	35.90	30.60
	Unit cost	99.75	95.10	95.80
	Mixing minutes per unit	6.60	4.00	5.20
	Selling price per unit	133.00	121.70	127.65
	Variable selling cost per unit	9.30	6.70	8.00
	Monthly demand in units	2395	4790	4125
1)	Mixing machine time for each product	15807	19160	21450
2)	As MH is the limiting factor, the contribution margin per MH should be found out.
	Variable expenses per unit	74.45	65.90	73.20
	Contribution margin per unit	58.55	55.80	54.45
	CM per machine minute	8.87	13.95	10.47
	As the CM per minute is highest for Product II, it should be produced to the maximum
	extent possible. The allocation of Machine time would be as under:
		Units to be produced	Machine Minutes required	Balance machine minutes available
	Product II	2395	9580	30420
	Product III	4790	19160	11260
	Product I	1706	11260	0
3)		I	II	III
	Unmet demand	0	0	2419
4)	Maximum that can be paid for extra machine time = 2419*58.55/(2419*6.6) =	$          8.87
5)	Yes, variable selling cost did figure into the arriving of CM per unit.
6)	The fixed cost per unit should be given along with the number of units for which it is
	worked out or how the total fixed cost has been assigned to individual products.
7)	The CM per minute of machine utilisation is the deciding criteria, as it maximises
	operating profit.
8)	As above
9)	Sales price or its difference does not reflect the economics of using the scarce
	machine hours.