Financial and Managerial Accounting (Looseleaf) (Custom Package)
Financial and Managerial Accounting (Looseleaf) (Custom Package)
6th Edition
ISBN: 9781259754883
Author: Wild
Publisher: MCG
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Chapter 23, Problem 5PSA

1.

To determine

The contribution margin per machine hour for each product.

1.

Expert Solution
Check Mark

Answer to Problem 5PSA

Solution:

The contribution margin per machine hour for Product G and Product B is $200 and $70.

Explanation of Solution

Calculate the contribution margin per machine hour for each product as shown below.

Contribution margin per machine hour Product G Product B
Selling price per unit $120 $160
Variable costs per unit 04 90
Contribution margin per unit $80 $70
Machine hours to produce 1 unit 0.4 1
Contribution margin per machine hour $200 $70

Table − 1

Conclusion

Hence, the contribution margin per machine hour for Product G and Product B is $200 and $70.

2.

To determine

The units of Product G and Product B should the company produce to operate with only one shift and total contribution margin each month.

2.

Expert Solution
Check Mark

Answer to Problem 5PSA

Solution:

The maximum unit of Product G is 440 units and the contribution margin is $35,200 per month.

Explanation of Solution

Sales mix recommendation: To the extent allowed by production and market constraints, the company should produce as much of Product G as possible. In single shift, the company can produce 176 hours per month.

Calculate the maximum output of G as shown below.

    MaximumoutputofG=(8×22)hourspermonth0.4hoursperunit=440unitspermonth

Therefore, the maximum output of G is 440 units per month.

Calculate the contribution margin at recommended sales mix as shown below.

    Contributionmargin=440units×$80perunit=$35,200

Therefore, the contribution margin at recommended sales is $35,200.

Conclusion

The company should produce maximum units of Product G that is 440 units with contribution margin $35,200 per month.

3.

To determine

The units of Product G and Product B for another shift and the contribution margin for the mix.

3.

Expert Solution
Check Mark

Answer to Problem 5PSA

Solution:

The maximum possible unit of Product G and Product B is 880 and 112 units per month. The contribution margin is $40,840 per month.

Explanation of Solution

The sales mix recommendation is that the maximum possible output of the product G will be doubled once the second shift is added.

Calculate the maximum output of G as shown below.

    MaximumoutputofG=352hourspermonth0.4hoursperunit=880unitspermonth

Therefore, the maximum output of G is 880 units per month.

The maximum level of Product G exceeds the company constraint for Product G that is 600 units per month. Therefore, the company should produce 600 units of Product G and allocate the remaining production capacity in the production of Product B.

Calculate the hours available for Product B as shown below.

Particulars Amount
Units of Product G 600 units per month
Hours per unit 0.4
Hours used for Product G 240 hours
Hours available for Product B (325hours240hours) 112 hours

Table − 2

Therefore, the hour available for Product B is 112 hours.

Calculate the maximum output of B as shown below.

    MaximumoutputofB=112hourspermonth1hourperunit=112unitspermonth

Therefore, the maximum output of B is 112 units per month.

Calculate the contribution margin at recommended sales mix as shown below.

Particulars Units Contribution/unit Product B
Product G 600 80 $48,000
Product B 112 70 $7,840
Less extra shift costs (15,000)
Total contributing margin $40,840

Table − 3

Therefore, the contribution margin at recommended sales is $40,840.

Conclusion

It is clear from the above calculation that the contribution margin of $40,840 is quite higher than the margin of $35,200 obtained from one shift alone. Hence, the management should try to add the second shift.

4.

To determine

To ascertain:

Whether the company pursues the given strategy and double the shift.

4.

Expert Solution
Check Mark

Answer to Problem 5PSA

Solution:

The company can pursue the given strategy and double the shift.

Explanation of Solution

The company can loosen up the market constraint for the sales of Product G to the extent, where it can sell 700 units by incurring additional marketing cost. This implies that 700 units of product G can be produced by the company and they can allocate its remaining productive capacity to product B.

Calculate the hours available for Product B as shown below.

Particulars Amount
Units of Product G 700 units per month
Hours per unit 0.4
Hours used for Product G 280 hours
Hours available for Product B (325hours280hours) 72 hours

Table − 4

Therefore, the hour available for Product B is 72 hours.

Calculate the maximum output of B as shown below.

    MaximumoutputofB=72hourspermonth1hourperunit=722unitspermonth

Therefore, the maximum output of B is 72 units per month.

Calculate the contribution margin at recommended sales mix as shown below.

Particulars Units Contribution/unit Product B
Product G 700 80 $56,000
Product B 72 70 $5,040
Less extra shift costs (15,000)
Less extra marketing costs (12,000)
Total contributing margin $34,040

Table − 5

Therefore, the contribution margin at recommended sales is $34,040.

Conclusion

It is clear from the above calculation that the contribution margin of $40,840 is quite lower than the margin of $40,840 obtained under the existing market constraints.

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