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Kitchen Magician, Inc. has assembled the following data pertaining to its two mo

ID: 2594143 • Letter: K

Question

Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products.

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $32. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

If 54,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?

With all other things constant, if management is able to reduce the direct material for an electric mixer to $20 per unit, how many units of each product should be manufactured? Purchased?

Blender Electric Mixer Direct material $ 20 $ 33 Direct labor 14 29 Manufacturing overhead @ $42 per machine hour 42 84 Cost if purchased from an outside supplier 62 107 Annual demand (units) 22,000 32,000

Explanation / Answer

Machine hours available = 54000

Limiting factor = Machine hour

Blender

Electric Mixer

Direct material

20

33

Direct labor

14

29

Variable manufacturing overhead (42-32)

42-32 = 10

84-(32*2) = 20

Total variable cost

44

82

Cost if purchased from outside supplier

62

107

Savings

62 – 44 = 18

107-82 = 25

Machine hours required

1

2

Savings per machine hour

18/1 = 18

25/2 =12.5

Rank

1

2

Optimal Product Mix

Units produced/Purchased

Hours available

Remaining hours

Rank

Production of Blender

22000*1 = 22000

54000

54000-22000 = 32000

1

Production of Electric Mixer

32000/2 = 16000

0

0

2

Purchase of Electric Mixer

32000 – 16000 = 16000

0

0

3

If management able to reduce the direct material for an electric mixer to $20 per unit:

Limiting factor = Machine hour

Blender

Electric Mixer

Direct material

20

20

Direct labor

14

29

Variable manufacturing overhead (42-32)

42-32 = 10

84-(32*2) = 20

Total variable cost

44

69

Cost if purchased from outside supplier

62

107

Savings

62 – 44 = 18

107-69 = 38

Machine hours required

1

2

Savings per machine hour

18/1 = 18

38/2 =19

Rank

2

1

Optimal Product Mix

Units produced/Purchased

Hours available

Remaining hours

Rank

Production of Electric Mixer

54000/2 = 27000

54000

54000-54000 = 0

1

Purchase of Electric Mixer

32000 – 27000 = 5000

0

0

2

Purchase of Blender

22000

0

0

3

Blender

Electric Mixer

Direct material

20

33

Direct labor

14

29

Variable manufacturing overhead (42-32)

42-32 = 10

84-(32*2) = 20

Total variable cost

44

82

Cost if purchased from outside supplier

62

107

Savings

62 – 44 = 18

107-82 = 25

Machine hours required

1

2

Savings per machine hour

18/1 = 18

25/2 =12.5

Rank

1

2