Question: Ortiz 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 . . . . . . . . . 0.8 hours 2.0 hours
Maximum unit sales per month . . . . . . . . . . . 400 units 350 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 $6,500 additional fixed costs per month.
Required: 1. Determine the contribution margin per machine hour that each product generates.
2. 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?
3. 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? Should the company add the new shift? Explain.
4. Suppose that the company determines that it can increase Product G's maximum sales to 440 units per month by spending $2,000 per month in marketing efforts. Should the company pursue this strategy and the double shift? Explain.