The senior management at Davis Watercraft would liks to determine if it is possi

Question

The senior management at Davis Watercraft would liks to determine if it is possible to improve firm profitability by changing their existing product mix Currently, the product mix is determined by giving resource priority to the highest contribution margin watercrafts Davis Watercraft always has a contingent of 10 workers on hand; each worker is paid $28 per hour. Overhead costs are $13,000 per week. The plant operates 18 hours per day and 6 days per week. Labor is considered a fixed expense because workers are paid for their time regardless of their utilization. The production manager has determined that workstation 1 is the bottleneck. Detailed production information is provided below 370 S335 Material costs Weakly demand Processing Time Station 1 Processing Time Station 2 Processing Time Station 3 Time Station 4 a. Using the traditional method, which bases decisions solely on a product's contribution to profits and overhead, what is the product mix that yields the highest total profn? (Enter your responses rounded to the nesrest whole number) Product mix

Explanation / Answer

a) Using traditional method, production is prioritised based on contribution margin of each product.

Step 1: Compute contribution margin of each product

Contribution margin of A = 370 - 50 = $ 320

Contribution margin of B = 335 - 45 = $ 290

Contribution margin of C = 420 - 120 = $ 300

Based on contribution margin, priority of production is A, C and B

Step 2: Determine available capacity of each station = 6 days per week * 18 hours per day * 60 minutes per hour = 6480 minutes

Step 3: Find bottleneck station - Production manager has already determined that station 1 is the bottleneck.

Step 4: Determine product mix:

Minutes left for station 1 after production of 90 units of A = 6480 - 90*66 = 540

Production of C = 540/33 = 16.36 ~ 16

Optimal product mix: A = 90, B = 68, C = 16

Total profit = Total contribution margin from three products - Overhead cost - Labor cost

= 90*320 + 68*290 + 16*300 - 13000 - 10*6*18*28

= $ 10,080

b) Using the bottleneck-based method, Production is prioritized based on contribution margin per minute of bottleneck station.

Contribution margin of A per minute of station 1 = 320/66 = 4.85

Contribution margin of B per minute of station 1 = 290/0 = infinity

Contribution margin of C per minute of station 1 = 300/33 = 9.1

Based on contribution margin per minute of bottleneck station, priority is B, C, A

Minutes left of station 1 after production of B and C = 6480 - 68*0 - 36*33 = 5292

Production of A = 5292/66 = 80.2 ~ 80  

Optima product mix is:

A = 80, B = 68, C = 36

Resulting profit = 80*320 + 68*290 + 36*300 - 13000 - 10*6*18*28 = $ 12,880

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