Question

Problem 23-5A Analysis of sales mix strategies LO A1 Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month Product G $230 180 $130 0.4 hours 650 units Product B $260 156 $104 1.0 hours 250 units The company presently operates the machine for a single eight-hour shift for 22 working days each month 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 $13,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating tosses, if any, as negative values.) Management is thinking

Answer 1

(1)

	Product G	Product B
Contribution Margin pu	130	104
Machine Hrs pu	0.4	1
Contribution Margin per Machine Hr	325	104

	Product G	Product B	Total
Maximum no of units to be sold	650	250
Hrs required to produce maximum units	(650 * 0.4) =260	(250 * 1) =250	510

(2) Continues to operate only one shift :-

Total Hrs available in 1 shift = 22 days * 8 hrs = 176 hrs

First we need to produce Product G

Then we need to produce Product B

	Product G	Product B	Total
Hrs dedicated to the production of each product	176	0	176
Units produced for most profitable sales mix	440	0
Contribution margin per unit	130	-
Total contribution-one shift	57200	-	57200

(3) If company adds another shift:-

Total Hrs available = 22 days * 16 hrs = 352 hrs

	Product G	Product B	Total
Hrs dedicated to the production of each product	260	92	352
Units produced for most profitable sales mix	650	92
Contribution margin per unit	130	104
Total contribution-two shift	84500	9568	94068
(-) Additional Fixed cost			13000
Net contribution			81068
(-) Total contribution-one shift			57200
Net Benefit			23868

Yes the company should persue this strategy

(4) Product G maximum sales to 700 units per month :-

	Product G	Product B	Total
Hrs dedicated to the production of each product	280	72	352
Units produced for most profitable sales mix	700	72
Contribution margin per unit	130	104
Total contribution-two shift & marketing campaign	91000	7488	98488
(-) Additional Fixed cost- two shift			13000
(-) Additional Fixed cost- marketing			12000
Net contribution			73488
(-) Total contribution-two shift			57200
Net Benefit			16288

No company should not persue this strategy