Sealing Company manufactures three types of DVD storage units. Each of the three

Question

Sealing Company manufactures three types of DVD storage units. Each of the three types requires the use of a special machine that has a total operating capacity of 15,000 hours per year. Information on the three types of storage units is as follows: Sealing's marketing director has assessed demand for the three types of storage units and believes that the firm can sell as many units as it can produce. How many of each type of unit should be produced and sold to maximize the company's contribution margin? If an amount box does not require an entry, leave it blank or enter "0". If required, round your answers to the nearest whole value What is the total contribution margin for your selection?. Now suppose that Sealing Company believes that it can sell no more than 12,000 of the deluxe model but up to 50,000 each of the basic and standard models at the selling prices estimated. What product mix would you recommend' If required, round your answers to the nearest whole value. What would be the total contribution margin?

Explanation / Answer

Basic Standard Delux Selling Price 9 30 35 Less : variable cost 6 20 10 Contribution margin 3 10 25 Machine hours required 0.1 0.5 0.75 In one hour no of storage units produced = 1/machine hours required 1/0.1 1/0.5 1/.75 Number of units produced in an hour = 10 2 1.333333333 1) Basic Standard Delux Number of units produced in an hour (A) 10 2 1.33 Contribution per unit (B) 3 10 25 contribution per hour ( A* B) 30 20 33.25 From the above , only Delux units should be produced as the contribution per hour is the highest Number of hours available per year = 15000 hours Hence total number of Delux units produced = 15000 * 1.33 = 19950 Contribution if only Delux units are produced = 19950* 25 = 498750 Hrence Basic = 0 units Standard = 0 units Delux = 19950 units Contribution =$ 498750 2) Maximun Number of units that can be sold of Delux units = 12000 Hence 1st 12000 units of Delux should be produced, as contribution margin per hour is maximum Number of hours required to produce 12000 units of Delux = 12000/1.33 = 9022.56 Balance number of hours available = 15000 - 9023 5977                                                                         = 5977 Maximum contribution per hour after Delux units is for basic unit Number of units that can be produced in 5977 hours = 5977*10 = 59770 units But the maximum sale is 50000 units , hence 50000 units of Basic unit should be produced For 50000 units , number of hours required = 50000/10 = 5000 hours Balance hours available for Standard units = 5977 - 5000 = 977 hours Number of units of Standard that can be produced in 977 hours = 977 * 2 = 1954 Hence with sale limitation , the production should be as follows Basic Standard Delux Number of units produced 50000 1954 12000 Contribution per unit 3 10 25 Contribution value 150000 19540 300000 Total Contribution = 150000 + 19540 + 300000 = 469540

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