Question

3M has three microwave/convection oven products: the 312M, the 314MC, and the 316MCR. 3M's manufacturing facility is currently operating at 90% capacity, and wants to use the unutilized capacity in further production of one of its units. The following information comes from 3M's current operations: 312M 314MC 316MCR Per Unit Data: Sales price $ 130.00 $ 143.00 $ 150.00 Variable costs 99.45 109.00 117.00 Fixed costs 16.15 18.70 17.85 Machine Hours Required* 44 42 * Fixed costs above are allocated on the basis of machine hours at $425/hour. 1. What considerations might 3M evaluate first? 2. What costs are relevant to 3M's analysis? 3. What is the contribution margin of each model? 4. What is the net income from each model? 5. Which model should 3M be producing more of? Why? Show your calculations.

Answer 1

1) The considerations which 3M evaluate first are :
a: The contribution per machine hour of each product.
b: The demand of each product.
2)The relevant costs for the 3M's analysis are the Sales Price and
Variable costs of each product which provides the contribution
and contribution per machine hour. The remaining capacity is
used for the product which provides highest Contribution per
machine hours, a limited factor.
3) Contribution of each model:
Model	312M	314MC	316MCR
Sales price (SP)	130	143	150
Variable costs	99.45	109	117
Contribution	30.55	34	33
Contribution margin, (Contri/SP)	0.235	0.238	0.220
4) Net Income of each model:
Model	312M	314MC	316MCR
Sales price (SP)	130	143	150
Variable costs	99.45	109	117
Contribution	30.55	34	33
Less: Fixed costs	16.15	18.7	17.85
Net Income	14.4	15.3	15.15
5) 3M should produce Model 312M because it provides
highest Contribution per machine hour of $0.804 per unit.
Model	312M	314MC	316MCR
Sales price (SP)	130	143	150
Variable costs	99.45	109	117
Contribution	30.55	34	33
Machine Hours required	38	44	42
Contribution per MH	0.804	0.7727	0.78571