1S. Product Mix Decision Price Variable Cost Contribution Margin Painting Depart
ID: 2590223 • Letter: 1
Question
1S. Product Mix Decision Price Variable Cost Contribution Margin Painting Department Executive Standing 150.00 200.00 70.00 110.00 80.00 90.00 Time Required (Minutes) 15 There are only 172 hours per month available currently in this department. At first glance, it would be tempting to make the standing desk, since it has a higher contribution margin per unit, but with the constraint of the painting department hours will that give MDT Desks the highest monthly contribution margin? To determine if that is true, we don't need to calculate the contribution margin for all 172 hours. We just need to calculate the contribution margin for one hour for each product and determine which is higher. paint, we can make 4 per hour (60/15). We can make 3 If the Executive desk takes 15 minutes to of the Standing desk per hour (60/20). Multiply the number of desks that can be made each hour by the contribution margin per desk. Executive Standing Number of desks per hour CM per desk CM per hour 80.00 90.00 320.00 270.00 Although the Executive Desk has a lower contribution margin per unit, the increased product per hour results in a higher contribution margin per hour. Therefore, we would only produce Executive desks. What if demand for the desks was limited? Example #1-Limited Demand MDT Desks, Ine. makes two types of office desks, Executive and Standing. Both desks require time in the Painting Department, but there are only 172 hours per month available currently in that department. The company can only sell 500 o each desk per month. What is the optimal product mix that would maximize profit each month?Explanation / Answer
As the first constraint is the time required for production, the contribution per hour for both desks are need to be compared to calculate optimum product mix but as along with time, demand of each desk is also limited, we should also consider the demand for calculating optimum product mix.
Calculation of Optimum Product mix
Demand for each desk = 500
Total available hours = 172 hours
Contribution per hour of Executive desk is higher than Standing desk, therefore the first preference of production will be Executive desk.
No. of executive desks produced in 1 hour = 4 desks
500 desks can be produced in 125 hours (500 hours/4 desks per hour).
Time remaining after production of Executive desk = 172 hours - 125 hours = 47 hours
Possible production of Standing Desk with remaining hours = (47 hours/3 desks per hour) = 15.66
Therefore the optimal product mix which can maximise contribution is:-
Executive Desk = 500 desks
Standing Desk = 15 desks
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