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			$	90					$	120
Variable costs per unit				30						72
Contribution margin per unit			$	60					$	48
Machine hours to produce 1 unit		0.4	hours					1.0	hours
Maximum unit sales per month		600	units					200	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 $6,000 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 Contribution margin per machine hour Product G Product B Total Maximum number of units to be sold 600 200 Hours required to produce maximum units 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 B Product G Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin one shift 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total contribution margin would this mix produce each month? Product B Product G Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin two shifts 4. Suppose that the company determines that spending $5000 per month in marketing efforts. Should the company pursue this strategy and the double shift? can increase Product G's maximum sales to 700 units per month by Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts and marketing campaign

Answer 1

1)

	Product G	Product B
Contribution Margin Per Unit	60.00	48.00
Machine Hours Per Unit	0.40	1.00
Contribution Margin Per Machine hour	150.00	48.00
	Product G	Product B	Total
Maximum number of units to be sold	600.00	200.00
Hours required to produce maximum units	240.00	200.00	440.00

2)

	Product G	Product B	Total
Hours Dedicated to the Production of Each Product	176.00		176.00
Units Produced For Most Profitable Sales Mix	440.00
Contribution Margin Per Unit	60.00
Total Contribution Margin - One Shift	26,400.00		26,400.00

3)

	Product G	Product B	Total
Hours dedicated to the production of each product	240.00	112.00	352.00
Units produced for most profitable sales mix	600.00	112.00
Contribution margin per unit	60.00	48.00
Total contribution margin - two shifts	36,000.00	5,376.00	41,376.00
Total Contribution Margin - One Shift			26,400.00
Change in contribution margin			14,976.00
Change in fixed costs			6,000.00
Change in operating income (loss)			8,976.00
Should the company add another shift?	Yes

4)

	Product G	Product B	Total
Hours dedicated to the production of each product	280.00	72.00	352.00
Units produced for most profitable sales mix	700.00	72.00
Contribution margin per unit	60.00	48.00
Total contribution margin - two shifts and marketing campaign	42,000.00	3,456.00	45,456.00
Contribution margin - two shifts without marketing campaign			41,376.00
Change in contribution margin			4,080.00
Additional marketing costs			5,000.00
Change in fixed costs			6,000.00
Change in operating income (loss)			-      6,920.00
Should the company pursue the marketing campaign?	No