Product mix and special order decisions Holmes Manufacturing Company produces three models of aquastatic controls: A17, B23, and XLT-all of which use the same basic component. The basic components are produced in department A. For model A17, the basic components are finished in department C. For both models B23 and XLT, the basic components undergo further modification in department \(B\) before being assembled in department \(C\). Since the modifications for B23 and XLT require similar machines and labor skills, the available capacity of department B can be used for either product.

Required

a. A foreign distributor has asked Holmes to bid on a special order of 1,000 units of the basic component. There would be a special shipping charge of \(\$ 3,200\). The Holmes plant has excess capacity to manufacture more than 1,000 basic components, and this order would not affect sales of the other products. Determine the minimum price that Holmes could offer.

b. Determine the contribution margin per unit for each of the three products.

c. Suppose there is excess demand for all three products and the plant is currently operating at capacity. The only change that can be made is shifting workers between department B and department C. Personnel in those two departments are able to work in either area with no loss in efficiency. Determine the optimal monthly production mix of the three products. Check whether your answer changes if the price of model B23 is \(\$ 140\).

Transcribed Image Text:

COST PER UNIT OF THE BASIC COMPONENT COSTS Direct materials cost Direct labor cost Fixed support (allocated based AMOUNT $3.80 10.00 15.00 on direct labor hours) Total cost per unit $28.80 Current production volume 4,000