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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.)

Required:
a. Determine the contribution margin per machine hour that each product generates.
b. 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?
c. 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?
d.Suppose that the company determines that it can increase Product GIs maximum sales to 700 units per month by spending S 12,000 per month in marketing efforts. Should the company pursue this strategy and the double shift?

Respuesta :

Answer and Explanation:

a. The computation of total contribution margin is shown below:-

                                                       Product G           Product B  

Contribution margin per unit a             80                        70  

Machine hours per unit b                      0.4                       1  

Contribution margin per

machine hour a × b                                200                    70

b. The computation of total contribution margin is shown below:-

                                                        Product G           Product B      Total

Maximum number of units

to be sold                                                  600                  200  

Hours required to produce

maximum units                                         240                 200            440

c. The computation of units of Product G and Product B and total contribution margin is shown below:-

                                                   Product G       Product B         Total

Hours dedicated to the

production of each product         240                   112                 352

Units produced for most

profitable sales mix  a                      600                  112  

Contribution margin per unit b         $80                  $70  

Total contribution

margin-two shifts a × b                   $48,000           $7,840       $55,840

Hours dedicated to the

production of each product                                                         35,200

Difference                                                                                     $20,640

Change in fixed costs                                                                   $15,000

Change in operating income(loss)                                              $5,640

Therefore, the company add another shifts. So, Yes it will add another shift of the company because it it income.

4. The computation of company pursue this strategy and the double shift is shown below:-

                                            Product G       Product B          Total

Hours dedicated to the

production of each product   280                72                     352

Units produced for

most profitable sales mix        700              72  

Contribution margin per unit   80                 70

Total contribution margin  56,000        5,040             61,040

Contribution margin - two shifts

without marketing campaign                                            55,840

Change in contribution margin                                         5,200

Additional marketing costs                                                $12,000

Change in fixed costs                                                         15,000

Change in operating income(loss)                                   -$21,800

The company pursue the marketing campaign, So, No because the change in operating income is in loss.