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28 October, 06:24

Short Inc has 5,200 machine hours available each month. The following information on the company's three products is available:

Product 1 Product 2 Product 3

Contribution margin per unit $ 45.00 $ 54.00 $ 22.50

Machine hours per unit 3 2 1

Sales demand in units 900 1,000 3,000

Required:

a. What production schedule will maximize the company's profits?

b. What will be the maximum possible contribution margin?

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Answers (1)
  1. 28 October, 08:19
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    a) Production schedule

    Product 3 - 3000 hr * $22.5 = 67,500

    Product 2 - 2000 * $ 17/hr = 34,000

    Product 1 - - 200 units * $15 / hr = 3,000

    b) Possible maximum contribution margin

    = $104,500

    Explanation:

    The production schedule that will be maximize the profit for Short Inc is that which maximizes the contribution per unit if the scarce machine hours.

    Since Short Inc faces a limiting a factor in form of machine hours, it should allocate its its resources in such a way that maximises the contribution per unit of machine hours.

    This is done below using a table:

    Product 1 2 3

    Contribution 45.00 54.00 22.50

    Machine hour / unit 3 2 1

    Contribution per hr 15 17/hr $22.5/hr

    Ranking 3rd 2nd 1st

    Production schedule:

    Prroduct units Machine hours required

    3 3000 3000*1 = 3000

    2 1000 1000 * 2 = 2000

    1 200 66.7 200

    5,200

    Amount of machine hours available for product 1 is the a balance after allocation to Product 3 and Product 2. It is determined as follows:

    =5,200 - (3000 + 2000)

    = 200 hours

    Units of product 1 to be produced = 200/3 = 66.7 units

    Optimum production schedule

    Product 3 - 3000 units

    Product 2 - 1000 units

    Product 1 - -66.7 units

    B) Maximum possible contribution margin

    Product 3 - 3000 hr * $22.5 = 67,500

    Product 2 - 2000 * $ 17/hr = 34,000

    Product 1 - - 200 units * $15 / hr = 3,000

    Total maximum contribution = $67,500 + $34,000 + $3000

    = $104,500
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