Your Company makes three products in a single facility. These products have the following unit...
Question:
Your Company makes three products in a single facility. These products have the following unit product costs:
| Product A | Product B | Product C | |
| Direct material | $26.00 | $26.00 | $27.00 |
| Direct labor | 15.00 | 17.00 | 16.00 |
| Variable manufacturing overhead | 4.00 | 5.00 | 6.00 |
| Fixed manufacturing overhead | 21.00 | 28.00 | 23.00 |
| Unit cost | $66.00 | $76.00 | $72.00 |
Additional data concerning these products are listed below:
| Product A | Product B | Product C | |
| Mixing minutes per unit | 3 | 2 | 2.5 |
| Selling price per unit | $76.00 | $90.00 | $84.00 |
| Variable selling cost per unit | $4.00 | $3.00 | $5.00 |
| Monthly demand in units | 1,500 | 3,000 | 4,000 |
The mixing machines are potentially the constraint in the production facility. A total of 18,000 minutes is 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?
Resource Allocation to Products for Profit Maximization:
A company usually has constraints for resources available such as direct labor hours, machine hours etc and hence in order to maximize the operating profits, the products with the highest contribution margin per unit of resource deployed are produced first.
Answer and Explanation: 1
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a. How many minutes of mixing machine time would be required to satisfy demand for...
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Cost-Volume-Profit Analysis: Definition & Examples
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Chapter 3 / Lesson 3
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Cost-volume profit analysis identifies the ideal production and pricing standards to reach company goals by comparing the cost to sales volume. Learn the formula for this analysis and the inclusion of contribution margin ratios in decision-making.
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