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 120 72 Selling price per unit Variable costs per unit $ 90 30 Contribution margin per unit $ 60 $ 48 Machine hours to produce 1 unit Maximum unit sales per month 0.4 hours 1.0 hours 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 Total Product G Product B 200 Maxim um number of units to be sold 600 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? Total Product G Product B 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 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 4. Suppose that the company determines that it can increase Product G's maximum sales to 700 units per month by spending $5,000 per month in marketing efforts. Should the company pursue this strategy and the double shift? 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

Solution

1.

	Product G	Product B
Contribution margin per unit	$60	$48
Machine hours per unit	0.4	1.0
Contribution margin per machine hour	$150 (60/.4)	$48 (48/1)
	Product G	Product B	Total
Maximum number of units to be sold	600	200
Hours required to produce maximum units	240 (600×.4)	200 (200×1)	440

2.

	Product G	Product B	Total
Hours dedicated to the production of each product	176 (22 days×8 hours)
Units produced for most profitable sales mix	440 (176/.4)
Contribution margin per unit	$60
Total contribution margin -one shift	$26,400

3.

	Product G	Product B	Total
Hours dedicated to the production of each product	240 hours	112 hours (352-240)	352 hours (176×2)
Units produced for most profitable sales mix	600	112
Contribution margin per unit	$60	$48
Total contribution margin two shift	$36000	$5,376	$41,376
Total contribution margin-one shift			$26,400
Change in contribution margin			$14,976
Change in fixed costs			$6,000
change in operating income(loss)			$8,976
Should the company add another shift	yes

4.

	Product G	Product B	Total
Hours dedicated to the production of each product	280 hours (700×.4)	72 hours (352-280)	352 hours (176×2)
Units produced for most profitable sales mix	700	72
Contribution margin per unit	$60	$48
Total contribution margin two shift and marketing campaign	$42000	$3,456	$45,456
Total contribution margin-two shift without marketing campaign			$41,376
Change in contribution margin			$4,080
Change in fixed costs			$6,000
Additional marketing costs			$5,000
change in operating income(loss)			$(6,980)
Should the company pursue marketing change	no

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