Question

Hello,

Just want to compare.

Thanks,

Denver Cabinets Company (DCC) produces and sells specialty wooden cabinets. Production

is machine-intensive. DCC’s variable costs are direct materials, variable machining costs

and sales commissions. Robert Denver, the owner, is planning production for 2011.

Salespeople are paid a 6% commission on each Colonial or Modern models sold and an 8%

commission on each Distressed model sold. Fixed costs (administrative/selling and

production) total $8,750,000. Annual capacity is 50,000 machine hours which is limited by

the availability of machines. Variable machining costs are $200 per hour.

Type of Wooden Cabinet                                    Annual Demand in Units              Selling Price Per Unit             Direct Material cost per unit         Variable Machining Cost Per Unit

Colonial                                                                       4,000                                                 $3,000                                              $750                                                      $600

Modern                                                                        5,000                                                 $2,100                                              $500                                                      $500

Distressed                                                                  30,000                                                $800                                                $100                                                       $300

a. Calculate the machine hours per unit required to satisfy the estimated demand for

each type of cabinet.

b. Calculate the contribution margin per unit earned from each type of cabinet?

c. Advise Mr. Denver on the most profitable product mix based on these three models.

Answer 1

a) Calculation of Machine hours per unit

	Colonial	Modern	Distressed
Variable Machining Costs per unit ($)	600	500	300
Variable Machining Costs per hour ($)	200	200	200
Machine Hours per unit = Variable Machining Costs per unit / Variable Machining Costs per hour	3	2.5	1.5

b) Calculation of Contribution Margin per Unit:

	Colonial	Modern	Distressed
Sale Price per unit ($)	3000	2100	800
Less: Variable Costs ($)
Direct Material per unit ($)	750	500	100
Variable Machining Costs per unit ($)	600	500	300
Sales Commission per unit ($)	180	126	64
Total Variable Cost per unit ($)	1530	1126	464
Contribution per unit ($)	1470	974	336

Solution c) After analysing the Contribution per unit, we see that Colonial Model is the most profitable then comes Modern and the least profitable is Distressed.

If we plan to produce as per their annual demand, then following will be the total number of Machine hours required

	Colonial	Modern	Distressed	Total
Annual Demand Units	4000	5000	30000	39000
Machine Hours per unit	3	2.5	1.5
Total Hours required	12000	12500	45000	69500

However, the Annual capacity is only 50,000 Machine hours.

Hence, it is recommended that Colonial and Modern should be produced 100% of the annual demand

Therefore, the total hours required for producing Colonial and Modern = 12000 + 12500 = 24,500 Machine Hours

Machine Hours available for producing Distressed Model:

= Total Capacity - Machine hours utilised by Colonial and Modern Model

= 50000 Hours - 24500 Hours = 25,500 Machine Hours

Hence, the number of units of Distressed Model that can be produced
= Machine Hours available for producing Distressed Model / Machine Hour per unit for Distress Model

= 25,500 Hours / 1.5 Hour per unit

= 17,000 Units

Therefore, the product Mix recommended for Mr. Denver is

	Colonial	Modern	Distressed
No. of Units to be produced	4000	5000	17000
No. of Machine Hours per unit	3	2.5	1.5
Total Hours	12000	12500	25500