Kitchen Magician, Inc. has assembled the following data pertaining to its two mo
ID: 2388433 • Letter: K
Question
Blender Electric Mixer
Direct Material $6.00 $11.00
Direct Labor $4.00 $9.00
Manufacturing overhead @ 16 per machine hour $16.00 $32.00
Cost if purchasing from an outside supplier $20.00 $38.00
Annual Demand (Units) 20,000 28,000
Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $10. Kitchen Magician's management has a policy of filling all sales orders, even if it means purchasing from outside suppliers.
1. If 50,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?
2. With all other things constant, if management is able to reduce the direct material for an electric mixer to $6 per unit, how many units of each product should be manufactured? Purchased?
Explanation / Answer
Statement of Ranking
We need to produce Blender only. In case of Electric Mixer, we need to purchase from outside supplier due to negative gain
(2)
We need to produce both the above products due to positive gain in manufacture over purchase.But we need to utilise the machine hrs firstly to Blender and balance to Electric Mixer according to ranking assign as above.If their is deficiet in machine hrs then we need to purchase balance Electric Mixer
Blender Production = 20000
Balance machine hrs = 50000 - (20000 * 1hr) = 30000 hrs
Electric Mixer Production = 30000hrs/2hr per unit = 15000 units of Electric mixer
Electric Mixer Purchase from outside supplier = 28000 - 15000 = 13000 units
Blender Electric Mixer DM 6 11 DL 4 9 Variable mfr cost 6 22 Total VC per unit (A) 16 42 Purchase price (B) 20 38 Gain in mfr per unit (B-A) 4 -4 Machine hrs 1 2 Gain per machine hr 4 -2 Ranking 1st 2ndRelated Questions
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