Question:
Maximus Company has met all production needs for the existing month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and unit costs for three models of one of its product lines are as given.
Plain model Regular model Super model
Selling price £30.00 £32.50 £40.00
Direct material £9.00 £10.00 £9.50
Direct labour £5.00 £7.50 £10.00
Variable overhead £4.00 £6.00 £8.00
Fixed overhead £8.00 £7.50 £7.50
Variable overhead is applied on the basis of direct labor dollars, while fixed overhead is applied on the basis of machine hours. There is enough demand for the additional production of any model of the product line.
a. If Maximus Company has excess machine capacity and will add more labor as needed (i.e. neither machine capacity nor labor is a constraint), which product is the most smart to produce? Give calculations and reasons to support your answer.
b. If Maximus Company has excess machine capability but a limited amount of labour time available, to which product or products could the excess production capacity be devoted?