Question

Holton Company makes three products in a single facility. Data concerning these products follow:

	Product
	A		B		C
Selling price per unit	$	125.40	$	79.90	$	168.00
Direct materials	$	54.60	$	44.50	$	100.90
Direct labor	$	39.30	$	14.20	$	30.00
Variable manufacturing overhead	$	7.50	$	4.60	$	14.00
Variable selling cost per unit	$	14.30	$	3.30	$	8.60
Mixing minutes per unit		25.30		2.50		2.50
Monthly demand in units		3,000		1,000		2,000

The mixing machines are potentially the constraint in the production facility. A total of 14,000 minutes are 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?

Answer 1

a)	Demand on mixing machine
				Product
				A	B	C
	Mixing minutes per unit			25.3	2.5	2.5
	monthly demand in units			3,000	1,000	2,000
	total minutes required			75900	2500	5000
b)	Optimal production plan
					Product
					A	B	C
	Selling price per unit				125.4	79.9	168
	Direct materials				54.6	44.5	100.9
	Direct labor				39.3	14.2	30
	Variable manufacturing overhead				7.5	4.6	14
	variable selling cost per unit				14.3	3.3	8.6
	total variable cost per unit				115.70	2.50	153.50
	contribution margin per unit				9.70	77.40	14.50
	mixing minutes per unit				13.7	2.5	2.5
	contribution margin per minute				0.71	30.96	5.8
	Rank in terms of profitability				3	2	1
	optimal production				257	1000	2000
c)	the company should be willing to pay upto the contribution margin per minute
	for the job which is $.71