Problem 10-5A Analysis of sales mix strategies LO A1 Edgerron Company is able to

Question

Problem 10-5A 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.

Product G Product B Selling price per unit $ 150 $ 180 Variable costs per unit 60 108 Contribution margin per unit $ 90 $ 72 Machine hours to produce 1 unit 0.4 hours 1.0 hours Maximum unit sales per month 550 units 200 units 1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit Contribution margin per machine hour Product G Product B Total Maximum number of units to be sold 550 200 Hours required to produce maximum units 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin one shift

Explanation / Answer

1 Contribution margin per unit 90 72 Machine hours per unit 0.4 1 Contribution margin per machine hour 225 72 Product G Product B Total Maximum number of units to be sold 550 200 Hours required to produce maximum units 220 200 2 Product G Product B Total Hours dedicated to the production of each product 176 162 Units produced for most profitable sales mix 440 Contribution margin per unit 90 Total contribution margin - one shift 39600 3 Product G Product B Total Hours dedicated to the production of each product 220 132 352 Units produced for most profitable sales mix 550 132 Contribution margin per unit 90 72 Total contribution margin - two shifts 49500 9504 59004 Total contribution margin - one shift 39600 Change in contribution margin 19,404 Change in fixed costs 9,000 Change in operating income(loss) 10,404 Should the company add another shift? Yes 4 Product G Product B Total Hours dedicated to the production of each product 240 112 352 Units produced for most profitable sales mix 600 280 Contribution margin per unit 90 72 Total contribution margin - two shifts and marketing campaign 54000 20160 74160 Contribution margin - two shifts without marketing campaign 59004 Change in contribution margin 15156 Additional marketing costs 8000 Change in fixed costs 9000 Change in operating income(loss) -1844 Should the company pursue the marketing campaign? No

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