Problem 23-5A Analysis of sales mix strategies LO A1 Edgerron Company is able to
ID: 2526779 • Letter: P
Question
Problem 23-5A Analysis of sales mix strategies LO A1
Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available.
The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $8,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.)
Explanation / Answer
Answers
Single shift = 8 hours x 22 days = 176 hours
Double shift = 176 hours x 2 = 352 hours
Product G
Product B
Contribution margin per unit
$82
$64
Machine hours required per unit
0.4
1
Contribution margin per machine hour
$205
$64
Product G
Product B
Total
Maximum number of units to be sold
600
150
750
Hours required to produce maximum units
[600 x 0.4] 240
[150 x 1] 150
390
Single shift total hours = 176 hours
Product G
Product B
Total
Hours dedicated to the production of each product
176
0
176
Units produced for most profitable sales mix
[176/0.4] 440
0
Contribution margin per unit
$82
$64
Total contribution margin - one shift
$36,080
$0
$36,080
Double shift = 352 hours
Product G
Product B
Total
Hours dedicated to the production of each product
240
112
352
Units produced for most profitable sales mix
[240/0.4] 600
[112/1] 112
Contribution margin per unit
$82
$64
Total contribution margin - two shifts
$49,200
$7,168
$56,368
(-) Additional Fixed Cost
$8,000
Net Benefit [total]
$48,368
Product G
Product B
Total
Hours dedicated to the production of each product
[700units x 0.4] 280
[352 – 280] 72
352
Units produced for most profitable sales mix
700
72
Contribution margin per unit
$82
$64
Total contribution margin - two shifts and marketing campaign
$57,400
$4,608
$62,008
(-) Additional fixed cost for double shift
$8,000
(-) Amount spent for increasing 'G' sale
$7,000
Net Benefit
$47,008
NO, the company should not pursue this strategy as Net Benefit in Requirement 4 is less than Requirement 3. Hence, the company should just pursue the strategy of DOUBLE SHIFT only.
Product G
Product B
Contribution margin per unit
$82
$64
Machine hours required per unit
0.4
1
Contribution margin per machine hour
$205
$64
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