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 Selling price per unit $ 120 $ 160 Variable costs per unit 40 90 Contribution margin per unit $ 80 $ 70 Machine hours to produce 1 unit 0.4 hours 1.0 hours Maximum unit sales per month 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 $15,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)

Answer 1

Answer:

                                                             Product G           Product B

Selling price per unit                              $120                   $160

Variable costs per unit                            $40                    $90

Contribution margin per unit                  $80                    $70

Machine hours per unit                    0.4 hours              1.0 hours

Max. unit sales per month               600 units              200 units

machine operate 8 hours per day during 22 days per month, total hours of machine work per month = 176

                                                         Product G             Product B

Machine hours per unit                    0.4 hours              1.0 hours

Contribution margin per                    $200                      $70

machine hour

number of hours needed to               240                      200             440

produce maximum sales                                                                  in total

Currently the company should only produce Product G, since it is able to produce 440 units per month and that generates a contribution margin of $35,200.

If the company decides to produce in two shifts, then it should produce 600 units of Product G (using 240 machine hours) and use the remaining 112 machine hours to produce 112 units of product B. This will generate a total contribution margin of: $48,000 +$7,840 = $55,840.

The additional contribution margin generated = $55,840 - $35,200 = $20,640, which is higher than the additional costs generated by working in two shifts. The second shift will increase the company's p´profits by $5,640 (= $20,640 - $15,000).