Norton’s Mufflers manufactures three different product lines, Model X, Model Y,

Question

Norton’s Mufflers manufactures three different product lines, Model X, Model Y, and Model Z. Considerable market demand exists for all models. The following per unit data apply:

                                                                                    Model X          Model Y           Model Z

         Selling price                                                         $80                  $90                $100

         Direct materials                                                    30                    30                    30

         Direct labor ($10 per hour)                                  15                    15                    20

         Variable support costs ($5 per machine-hour) 5                    10                    10

         Fixed support costs                                               20                    20                    20

         a.      For each model, compute the contribution margin per unit.

         b.      For each model, compute the contribution margin per machine-hour.

         c.      If there is excess capacity, which model is the most profitable to produce?

         d.      If there is a machine breakdown (therefore a constraint in machine hours), which model is the most profitable to produce?

         e.    If we only have 500 Machine horus and have three orders; one to produce at least 300 models of x; one to produce at least 100 Models of y; and the last order to produce at least 100 models of Z. In addition, if you select to complete a particular order (you don’t have to select all three) YOU MUST completed their minimum level required or not accepted that order at all (ie you cant drop below those levels above)

What would be your recommendation of product mix? Explain your decision.

Explanation / Answer

                                                        X Y Z          Selling price                                  80 90 $100          Direct materials                               30 30 30          Direct labor ($10 per hour)                    15 15 20          Variable support costs ($5 per machine-hour) 5 10 10          Fixed support costs                            20 20 20          Machine Hours = variable support cost / $5 1 2 2 a.          Contribution Margin per unit 30 35 40 b.          Contribution Margin per machine-hour 30 17.5 20 c. if there's excess capacity, then Model Z if the most profitable to produce because of the highest contribution margin per unit d. In case of capacity constraint, Model X is the most profitable to produce, because of the highest contribution margin per machine-hour e. For 500 hours capacity, we will select Model X, followed by Model Z in order of contribution margin per machine-hour. 300 units of Model X will take 300 production hours and 100 units of Model Z will take 200 hours. So This way, entire available capacity will be optimally utilised.

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