1. Gemini sells the following four products. The demands for the products are un
ID: 454090 • Letter: 1
Question
1. Gemini sells the following four products. The demands for the products are unlimited. Price and manufacturing cost data follow. All products require a simulation. Currently, only 1,000 hours of simulation time are available.
Product
Delta
Epsilon
Phi
Sigma
Selling price per unit
$ 2,000
$ 2,400
$3,400
$1,000
Standard cost per unit:
Variable
$ 950
$ 1,800
$2,200
$620
Fixed
850
200
600
100
Total
$1,800
$2,000
$2,800
$720
Contribution margin ratio
0.525
0.250
0.353
0.380
Gross profit ratio
0.100
0.167
0.176
0.280
Simulation time needed
per unit of product
3 hrs
2 hrs
3 hrs
1 hr
Gemini should produce which product first? Why? Show your work.
2
Use the same information given in #1. Assume that Gemini has made the correct decision in determining the order of production (which one first, second, etc). Gemini is now making Epsilon, but it needs more simulation time to satisfy the demand. An outside company, ExSimul could provide additional simulation time to Gemini. What is the maximum price that Gemini is willing to pay to ExSimul for each hour of simulation time? Show your work.
Product
Delta
Epsilon
Phi
Sigma
Selling price per unit
$ 2,000
$ 2,400
$3,400
$1,000
Standard cost per unit:
Variable
$ 950
$ 1,800
$2,200
$620
Fixed
850
200
600
100
Total
$1,800
$2,000
$2,800
$720
Contribution margin ratio
0.525
0.250
0.353
0.380
Gross profit ratio
0.100
0.167
0.176
0.280
Simulation time needed
per unit of product
3 hrs
2 hrs
3 hrs
1 hr
Explanation / Answer
Product
Delta
Epsilon
Phi
Sigma
Selling price per unit
$2,000
2400
3400
$1,000
Standard cost per unit:
Variable
950
1800
$2,200
620
Fixed
850
200
600
100
Total
1800
$2,000
2800
720
Contribution margin ratio
0.525
0.250
0.353
0.380
Gross profit ratio
0.100
0.167
0.176
0.280
Simulation time / unit
3
2
3
1
Gross profit
$200
$400
$600
$280
Gross profit per simulation hour
$67
$200
$200
$280
The order of products for production will be decided based on the gross profit per simulation hour.
According to this metric, the order of products would be Sigma, Epsilon, Phi and Delta.
2. Breakeven cost of simulation per hour for Epsilon is $ 200 per hour . So Gemini will be willing to pay a maximum price of $ 200 per hour to ExSimul.
Product
Delta
Epsilon
Phi
Sigma
Selling price per unit
$2,000
2400
3400
$1,000
Standard cost per unit:
Variable
950
1800
$2,200
620
Fixed
850
200
600
100
Total
1800
$2,000
2800
720
Contribution margin ratio
0.525
0.250
0.353
0.380
Gross profit ratio
0.100
0.167
0.176
0.280
Simulation time / unit
3
2
3
1
Gross profit
$200
$400
$600
$280
Gross profit per simulation hour
$67
$200
$200
$280
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