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Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher
Edition 3ISBN: 0073527114Optimum Product Mix
Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow:
| Basic | Classic | Formal |
Sales price | $30 | $64 | $190 |
Maximum annual demand (units) | 20,000 | 10,000 | 30,000 |
Input requirement per unit | |||
Direct material | 5 yards | .3 yards | .6 yards |
Direct labor | 7 hours | 2 hours | 7 hours |
Costs Variable costs | |
Materials | $20 per yard |
Direct labor | $16 per hour |
Factory overhead | $4 per direct labor-hour |
Marketing | 10% of sales price |
Annual fixed costs |
|
Manufacturing | $36,000 |
Marketing | $8,000 |
Administration | $30,000 |
The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 30,000 direct labor-hours per year caused by the plant layout.
Required
Show supporting data in good form.
a.How much operating profit could the company earn if it were able to satisfy the annual demand?
b.Which of the three product lines makes the most profitable use of the constrained resource, direct labor?
c.Given the information in the problem so far, what product mix do you recommend?
d.How much operating profit should your recommended product mix generate?
e.Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 10,000 more hours. The direct labor cost would increase from $16 to $19 per hour for all hours of direct labor used. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?
Verified
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Theory of constraints
Every organization faces with some limit or constraint which limits their achievement. Theory of constraints is used to deal with constraint faced by organization. In theory of constraint optimal product mix is chosen which would maximize contribution margin per unit of constraining resource.
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