Delta Corp. makes three products in a single facility. These products have the f

Question

Delta Corp. makes three products in a single facility. These products have the following unit product costs:

5.30

Additional data concerning these products are listed below:

The mixing machines are potentially the constraint in the production facility. A total of 40,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Questions

1. How many minutes of mixing machine time would be required to satisfy demand for all three products?

my answer = 56,417

2. Using only the available 40,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Round down to the nearest whole units.)

my answer = Product 1: -92 Product 2: 4,790 Product 3: 4125 (not confident in these answers)

3. Is there unmet demand for product(s)? If so, how much and for which product(s)?

4. Assume there is unmet product demand. How much in total should Delta be willing to pay for extra machine time?

my answer = 532.27 (Not confident in this answer)

5. Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

my answer = yes

6. Is there anything misleading about the figure given for fixed manufacturing overhead?

7. What is the significance of contribution margins with respect to question 2?

8. What is the significance of contribution margins with respect to question 4?

9. Why isn’t sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?

Product I Product 2 Product 3 Direct material $39.25 34.60 37.25 Direct labor 20.60 17.95 17.30 Variable manufacturing overhead

5.30

6.65 10.65 Fixed manufacturing overhead 34.60 35.90 30.60 Unit cost 99.75 95.10 95.80

Explanation / Answer

Product I Product 2 Product 3 Direct material $           39.3 $           34.6 $      37.3 Direct labor $           20.6 $           18.0 $      17.3 Variable manufacturing overhead $             5.3 $             6.7 $      10.7 Fixed manufacturing overhead $           34.6 $           35.9 $      30.6 Unit cost $           99.8 $           95.1 $      95.8 Mixing minutes per unit 6.6 4.0 5.2 Selling price per unit $         133.0 $         121.7 $    127.7 Variable selling cost per unit $             9.3 $             6.7 $       8.0 Monthly demand in units 2395 4790 4125 Minutes required for monthly demand 15807 19160 21450 Total minutes of machine time required 56417 Contribution margin per unit 58.55 55.80 54.45 Contribution margin per minute of machine time $               8.87 $             13.95 $      10.47 As the machine time is the constraining factor, the CM per unit of machine time is the criteria. Hence, the order of priority is Product 2, Product 3 and Product 1. The available machine time would be allocated as below: Units to be produced Machine minutes used Balance machine minutes available Product 2 4790 19160 20840 Product 3 4008 20840 0 Product 1 0 0 0 Product I Product 2 Product 3 Unmet demand 2395 0 117 The total that can be paid = 117*54.45+2395*58.55 = $       1,46,598 Total that can be paid per minute = 146598/(117*5.2+2395*6.6) = $               8.93 Yes. For finding out the CM per unit. The fixed manufacturing overhead is given per unit. The basis of charging fixed overhead is not mentioned. The amount of FOH per unit is almost the same for all the three products, which should not be correct, as the machine hours used is different. The CM per minute of machine time, is the criteria for assigning available machine time, as it maximises the operating income per machine minute. It indicates the total CM that is lost due to unmet damand, which can be considered as the total amount that can be incurred to buy machine time. Difference in sales price does not bear any relation to the income lost per unit. Total cost is also not appropriate, as it includes fixed costs that do not vary with volume of production. What is relevant, is the difference in CM per unit and that too CM per unit of machine time which is the limiting factor.

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