Decker Products manufactures standard and deluxe wooden swing sets. Selected dat

Question

Decker Products manufactures standard and deluxe wooden swing sets. Selected data related to each product is as follows:

Sales Prices: Standard $900 Deluxe $2,000

Direct materials cost per unit: Standard 100     Deluxe 500

Direct labor cost per unit: Standard 300      Deluxe 700

Variable overhead cost per unit: Standard 50     Delux 100

Machine hours per unit: Standard 4 hours      Delux 8 hours

Most of the manufacturing process for the sets is done on machines.

There is a maximum of 10,000 machine hours available each year. Refer to the Decker Products information above. If demand were strong by both sets and the company could sell an unlimited number of either style, how many of which kind(s) of wooden swing set(s) should be produced in order to mazimize profits?

2,500 standard setts

1,250 deluxe sets

833 standard sets and 833 deluxe sets

1,500 standard sets and 1,250 deluxe sets

2,500 standard setts

1,250 deluxe sets

833 standard sets and 833 deluxe sets

1,500 standard sets and 1,250 deluxe sets

Explanation / Answer

For each type, Contribution = Selling price - (Direct material + Direct labor + Variable overhead costs)

For Standard: Contribution = $900 - $(100 + 300 + 50) = $(900 - 450) = $450

For Deluxe: Contribution = $2000 - $(500 + 700 + 100) = $(2000 - 1300) = $700

Since machine hours is a limiting factor, profit is maximized by producing higher quantity of that type of set which has higher contribution per machine hour.

For standard: Contribution per machine hour = $450 / 4 = $112.5

For Deluxe: Contribution per machine hour = $700 / 8 = $87.5

So, Standard model should be produced first.

(a) Profit from 2500 Standard sets = $450 x 2500 = $1125000 [Total hours: 10000]

(b) Profit from 1250 Deluxe = $700 x 1250 = $875000 [Total hours: 10000]

(c) Profit from 833 of each = 833 x $(450 + 700) = 833 x $1150 = $957950

[Total hours = 833 x (4 + 8) = 833 x 12 = 9996]

(d) 1500 standard & 1250 deluxe sets cannot be manufactured because total required hours exceeds 10000 [= 1500 x 4 + 1250 x 8 = 6000 + 10000 = 16000].

Out of given choices, option (a) Gives highest profits.

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