y makes two products in a single facility. These products have the following uni
ID: 2597944 • Letter: Y
Question
y makes two products in a single facility. These products have the following unit product costs Products Selling price per unit Monthly demand in units Cost of Production ABC $63.00 4,000 XY7 $69.00 2,000 Direct material Direct labor Variable manufacturing overhcad Fixed manufacturing overhead Unit product cost 11.00 $12.00 $16.00 $14.00 $5.00 $18.50 $50.50 $5.00 S17.20 S48.20 Additional data concerning these products are listed below. Products XYZ ABC Mixing minutes required per unit The mixing machines are potential y the constraint in the production facility. Since Stigler expects to have only 13,000 minutes next month, they decided to inquire about the possibility of renting a mixing machine from another company that would provide additicnal 5,000 minutes. Up to how much should the company be willing to pay for e machine? Assume that the company has made the best use of the existing mixing machine capacity A. $18,500 B. S40,000 C. $37,000 D. $38,800 E. None of the aboveExplanation / Answer
Stigler Company
Determination of total mixing minutes needed by each product and the contribution margin per minute:
Products
XYA
ABC
Total
monthly demand in units
2,000
4,000
6,000
mixing minutes per unit
5
4
total mixing minutes needed
10,000
16,000
26,000
Determination of contribution margin per unit and per minute:
Products
XYZ
ABC
selling price
$69.00
$63.00
Direct materials
$11.00
$12.00
Direct labor
$16.00
$14.00
Variable overhead
$5.00
$5.00
Total variable cost per unit
$32.00
$31.00
Contribution margin per unit
$37
$32.00
mixing minutes per unit
5
4
Contribution margin per minute
$7.40
$8.00
Ranking
II
I
Since Product ABC ranks first in terms of contribution margin per minute, the available 13,000 minutes are first allocated to ABC.
ABC –
Required minutes to produce 4,000 units = 16,000
Available minutes = 13,000
Shortage 3,000 minutes
Maximum Number of units that can be produced with 13,000 minutes = 3,250
Shortage in production = 750 units
Renting of mixing machine from another company provides additional 5,000 units.
Determination of the price the company would be willing to pay for the machine:
Additional 5,000 minutes are first used to meet the 750 units demand of ABC
750 units need 3,000 minutes
Remaining 2,000 minutes are used to produce 400 units of XYZ
Hence the price the company would be willing to pay for the rent of mixing machine is calculated as follows,
ABC 3,000 minutes x $8 per minute $24,000
XYZ 2,000 minutes x $7.40 per minute $14,800
Total cost the company is willing to pay $38,800
Hence, the answer option is D. $38,800
Products
XYA
ABC
Total
monthly demand in units
2,000
4,000
6,000
mixing minutes per unit
5
4
total mixing minutes needed
10,000
16,000
26,000
Determination of contribution margin per unit and per minute:
Products
XYZ
ABC
selling price
$69.00
$63.00
Direct materials
$11.00
$12.00
Direct labor
$16.00
$14.00
Variable overhead
$5.00
$5.00
Total variable cost per unit
$32.00
$31.00
Contribution margin per unit
$37
$32.00
mixing minutes per unit
5
4
Contribution margin per minute
$7.40
$8.00
Ranking
II
I
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