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

1.

To determine

The contribution margin per machine hour for each product.

1.

Expert Solution
Check Mark

Answer to Problem 5PSB

Solution:

The contribution margin per machine hour for Product R and Product T is $100 and $35.

Explanation of Solution

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

Contribution margin per machine hour Product R Product T
Selling price per unit $60 $80
Variable costs per unit 20 45
Contribution margin per unit $40 $35
Machine hours to produce 1 unit 0.4 1
Contribution margin per machine hour $100 $35

Table − 1

Conclusion

Hence, the contribution margin per machine hour for Product R and Product T is $100 and $35.

2.

To determine

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

2.

Expert Solution
Check Mark

Answer to Problem 5PSB

Solution:

The maximum unit of Product R is 440 units and the contribution margin is $17,600 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 R as possible. In single shift, the company can produce 176 hours per month.

Calculate the maximum output of R as shown below.

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

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

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

    Contributionmargin=440units×$40perunit=$17,600

Therefore, the contribution margin at recommended sales is $17,600.

Conclusion

The company should produce maximum units of Product R that is 440 units with contribution margin $17,600 per month.

3.

To determine

The units of Product R and Product T for another shift and the contribution margin for the mix.

3.

Expert Solution
Check Mark

Answer to Problem 5PSB

Solution:

The maximum possible unit of Product R and Product T is 880 and 132 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 R will be doubled once the second shift is added.

Calculate the maximum output of R as shown below.

    MaximumoutputofR=352hourspermonth0.4hoursperunit=880unitspermonth

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

The maximum level of Product R exceeds the company constraint for Product R that is 550 units per month. Therefore, the company should produce 550 units of Product R and allocate the remaining production capacity in the production of Product T.

Calculate the hours available for Product T as shown below.

Particulars Amount
Units of Product R 550 units per month
Hours per unit 0.4
Hours used for Product R 220 hours
Hours available for Product T (325hours220hours) 132 hours

Table − 2

Therefore, the hour available for Product T is 132 hours.

Calculate the maximum output of T as shown below.

    MaximumoutputofT=132hourspermonth1hourperunit=132unitspermonth

Therefore, the maximum output of T is 132 units per month.

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

Particulars Units Contribution/unit Product T
Product R 550 40 $22,000
Product T 132 35 $4,620
Less extra shift costs (3,250)
Total contributing margin $23,370

Table − 3

Therefore, the contribution margin at recommended sales is $23,370.

Conclusion

It is clear from the above calculation that the contribution margin of $23,370 is quite higher than the margin of $17,600 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 5PSB

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 R to the extent, where it can sell 675 units by incurring additional marketing cost. This implies that 675 units of Product R can be produced by the company and they can allocate its remaining productive capacity to Product T.

Calculate the hours available for Product T as shown below.

Particulars Amount
Units of Product R 675 units per month
Hours per unit 0.4
Hours used for Product R 270 hours
Hours available for Product T (325hours270hours) 82 hours

Table − 4

Therefore, the hour available for Product T is 82 hours.

Calculate the maximum output of T as shown below.

    MaximumoutputofT=82hourspermonth1hourperunit=82unitspermonth

Therefore, the maximum output of T is 82 units per month.

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

Particulars Units Contribution/unit Product T
Product R 670 40 $27,000
Product T 82 35 $2,870
Less extra shift costs (3,250)
Less extra marketing costs (4,500)
Total contributing margin $22,120

Table − 5

Therefore, the contribution margin at recommended sales is $22,120.

Conclusion

Hence, it is clear from the above calculation that the contribution margin of $22,120 is quite lower than the margin of $23,370 obtained under the existing market constraints.

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