Question

Slavin Corporation manufactures two products, Alpha and Delta. Each product requires time on a single machine. The machine has a monthly capacity of 500 hours. Total market demand for the two products is limited to 150 units (each) monthly. Slavin is currently producing 110 Alphas and 110 Deltas each month. Cost and machine-usage data for the two products is shown in the following spreadsheet, which Slavin managers use for planning purposes:
Alpha Delta Total
Price $120 $150
Less variable costs per unit
Material 20 35
Labor 26 37
Overhead 14 14
Contribution margin per unit $60 $64
Fixed costs
Manufacturing $8,000
Marketing and administrative 5,000
$13,000
Machine hours per unit 2.0 2.5
Machine hours used 495
Machine hours available 500
Quantity produced 110 110
Maximum demand 150 150
Profit $640
Required:
a. How many Alphas and Deltas should the company produce each month to maximize monthly profit?
b. If the company produces at the level found in requirement (a), how much will monthly profit increase over the current production schedule?

Answer 1

Answer:

a. How many Alphas and Deltas should the company produce each month to maximize monthly profit?

• 150 Alphas
• 80 Deltas

b. If the company produces at the level found in requirement (a), how much will monthly profit increase over the current production schedule?

• $480 increase (or 75% increase)

Explanation:

                                                       Alpha            Delta

Price                                                $120             $150

Variable costs per unit :

• Material                                    $20              $35
• Labor                                        $26              $37
• Overhead                                 $14               $14  

Contribution margin per unit          $60              $64

Fixed costs :

• Manufacturing $8,000
• Marketing and administrative $5,000
• total                                                $13,000

Machine hours per unit                     2.0               2.5

Machine hours used                                  495

Machine hours available                           500

Quantity produced                             110               110

Maximum demand                             150              150

Profit                                                          $640

Contribution margin per machine hour:

                                                           $30               $25.60

this means you should produce as many Alphas as possible = 150. Production of 150 Alphas will consume 300 machine hours and the remaining 200 hours can be used to produce 80 Deltas.

Monthly profit:

[(150 x $60) + (80  x $64)] - 13,000 = $9,000 + $5,120 - $13,000 = $1,120, which represents a $480 increase (or 75% increase)