Question

1. Salt Company has 6,000 machine hours available to produce either Product 1 or Product 2. The cost accounting department developed the following unit information for each product:

	Product 1	Product 2
Sales Price	$35	$48
Direct Materials	8	12
Direct Labor	4	3
V. Manu O/H	7	5
F. Manu O/H	4	1
Machine Time Required	15 minutes	60 minutes

To satisfy current customer orders, Salt Company must produce at least 800 units of each product. Determine how Salt Company should use the 6,000 machine hours to maximize income and satisfy customer expectations

Chapter 7

2. What role does the salvage value for a piece of old equipment play in a decision to retain or replace equipment?

1. It is relevant because it reduces the loss on the sale of the old equipment
2. It is relevant because it increases the cost of the new equipment
3. It is relevant because it reduces the cost of the new equipment

Answer 1

	Product 1	Product 2
SP	35	48
less
Direct Mat	-8	-12
Direct Lab	-4	-3
Var OH	-7	-5
Contribution Per unit	16	28
Machine hr require	0.25	1
Contribution per machine hr	64	28
Since the contribution of Product 1 is more than Product 2.
Therefore, Product 1 should be produced
Total machine hr = 6000
	Product 1 Units	Product 2 Units	Hrs Used
Minimum 800 to be produced	800	800	1000	800*.25+800*1
For remaning, 5000 hr, product 1 should be made	20000
	(5000/.25)
Total Units to maximize Income	20800	800

1. It is relevant because it reduces the cost of the new equipment.

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