Question: Edgerton Company is able to produce two products, product A and Product B with the same machine in its factory. Note that only one product can be manufactured at a time using this machine. The company currently makes both products, but management is concerned that this strategy is not providing maximum benefit. They are thinking of adding a second shift and have asked you to figure out the best course of action. The following info is available:
|
|
|
|
Product A |
|
Product B |
| Selling price per unit |
|
|
110 |
|
150 |
| Variable costs per unit |
|
|
35 |
|
68 |
| Contribution margin per unit |
|
|
75 |
|
82 |
| Machine hours to produce ONE unit |
|
1/3 hour |
|
1 hour |
| Maximum customer demand for each product per month (max they can sell) |
|
|
|
|
|
540 units |
|
190 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 $12,500 additional fixed costs per month.
1 - Determine the contribution margin per machine hour that each product generates.
2 - How many units of Product A and Product B should the company produce if it continues to operate with only one shift? Assume all products produced are sold.
3 - How much total contribution margin does this sales mix produce each month?
4 - If the company adds another shift, how many units of Product A and Product B should it produce?
5 - How much total contribution margin would this mix produce each month?
6 - Should the company add the new shift?
7 - Suppose that, based on market research, the company determines that it can increase the Product B's maximum sales to 650 units per month by spending $10,000 per month in marketing efforts. Should the company pursue this strategy and the double shift?