Problem 2 JJ Inc. produces a number of specialized containers. In particular, it
ID: 2446262 • Letter: P
Question
Problem 2
JJ Inc. produces a number of specialized containers. In particular, it produces a product called WP that is a very special container that can be used to store toxic waste. This product necessitates the use of an automatic precision welding machine which needs very little labor time to operate it and once it is set up it pretty much runs on its own. A total of 2000 hours are available on this welding machine. Each unit of WP uses 0.8 hours (i.e. 48 minutes) of welding machine time. At present, this is the only use for the welding machine. The following further information is available.
Management believes that 3,000 units of WP can be sold per year. However, the precision welding machine is the limiting factor. Their production manager suggests that making mountain bike frames would be a better use of this welding machine since each frame would only require 0.2 hours (i.e. 12 minutes) of welding time on the precision welding machine and some additional assembly. After some research they find out that JJ can sell 3,500 mountain bike frames per year.
The following further information is available about WP and the mountain bike frames
Particulars
WP
Mountain Bike Frame
Selling Price
154.00
65.00
Unit Costs:
Direct materials
44.50
17.50
Direct labor (@$18 per hour)
4.50
22.50
Manufacturing Overhead
3.15
15.75
Selling and Administration Overhead
15.40
6.50
Total Unit costs
67.55
62.25
The following further information is available:
Most of the manufacturing overhead is for things such as rent on the factory, production manager’s salary, wages to mechanics, etc. However, there is a portion that varies based on the output. This variable portion amounts to $1.05 per unit of WP and $0.60 per mountain bike frame.
Selling and administration overhead is allocated to products based on revenues. However, a large portion of this overhead will be incurred regardless of the product mix and will not change even if additional sales are made beyond the current level. The variable portion amounts to $0.85 per unit of WP and $0.40 per mountain bike frame sold.
Required:
a. What is the optimal product mix of mountain bike frames and WP?
b. The production manager then points out that there is an external supplier who is willing to supply the needed quantities of WP at a cost of $120 per unit. Based on this additional information together with the information given in part a, determine the quantities of:
i) WP to be produced ____________
ii) WP to be bought _____________
iii) Mountain Bike frames produced ____________
that would maximize the profit for JJ
c. At this point, the HR manager points out that all employees are paid for 40 hours a week, even if they are idle for part of or all of the time and none of the employees are ever laid off. All the possible production options under consideration can be fully staffed without incurring any overtime. Does this information change your answers to parts (a) and (b) above? If yes, how? If not, why not?
Particulars
WP
Mountain Bike Frame
Selling Price
154.00
65.00
Unit Costs:
Direct materials
44.50
17.50
Direct labor (@$18 per hour)
4.50
22.50
Manufacturing Overhead
3.15
15.75
Selling and Administration Overhead
15.40
6.50
Total Unit costs
67.55
62.25
Explanation / Answer
Answer for question no.a:
As the contribution per limiting factor for WP is more when compared to frames, first the available hours should be used to produce WP and if any hour left the same should be utilized for frames.
Total hours available =2000 hours.
Time required for each unit of WP=48 minutes.
Total units of WP that can be produced with in 2,000 hours =2,000*60miutes/48
=2,500 units of WP can only be produced. As the demand available for WP is not completed by the availeble hours, the frames cannot be produced.
Answer for question no.b:
The cost of WP if purchased is $120, and if it is produced it is =$67.55,
Hence, it is cheaper to produce than to purchase WP.
The demand available in the market for WP is 3,000 units, but the available capacity to produce WP is only 2,500 units.
Therefore, to maximize the profit, it is suggested first to produce 2,500 and then to purchase the balance units of WP i.e.,3,000 units of total avilable demand - Units produced =3000 -2,500 = 500 units ofWP to be purchased at $120, and to be sold @ $154.
As there is no machine capacity left to produced frames, nothing is produced.
Hence answer for b1) 2,500
b2) buy 500 units
b 3) 0 units of Mountain bike frames.
Particulars WP Mountain Bike Frame Selling Price(A) $154.00 $65.00 Unit Costs: Direct materials $44.50 $17.50 Direct labor (@$18 per hour) $4.50 $22.50 Manufacturing Overhead $1.05 $0.60 Selling and Administration Overhead $0.85 $0.40 Total variable costs(B) $50.90 $41.00 Contribution C= A-B $103.10 $24.00 Number of minutes required on the machine to produce one unit (D) 48 12 Contribution per minute E=C/60 as one hour has 60 minutes $1.72 $0.40 Contribution for each unit of product on the machine F=E*D 82.48 4.8Related Questions
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