Product mix decision Aramis Aromatics Company produces and sells its product AA100 to well-known cosmetics companies for $940 per ton. The marketing manager is considering the possibility of refining AA100 further into finer perfumes before selling them to the cosmetics companies. Product AA101 is expected to command a price of $1500 per ton, and AA102 a price of $1700 per ton. The maximum expected demand is 400 tons for AA101 and 100 tons for AA102. The annual plant capacity of 2400 hours is fully utilized at present to manufacture 600 tons of AA100. The marketing manager proposed that Aramis sell 300 tons of AA100, 100 tons of AA101, and 75 tons of AA102 in the next year. It requires four hours of capacity to make one ton of AA100, two hours to refine AA100 further into AA101, and four hours to refine AA100 into AA102 instead. The plant accountant has prepared the following cost sheet for the three products:

REQUIRED

(a) Determine the contribution margin for each product.

(b) Determine the production levels for the three products under the present constraint on plant capacity that will maximize total contribution.

(c) Suppose a customer, Cosmos Cosmetics Company, is very interested in the new product AA101. It has offered to sign a long-term contract for 400 tons of AA101. It is also willing to pay a higher price if the entire plant capacity is dedicated to the production of AA101. What is the mini¬ mum price for AA101 at which it becomes worthwhile for Aramis to dedi¬ cate its entire capacity to the production of AA101 ?

(d) Suppose, instead, that the price of AA101 is $1500 per ton and that the capacity can be increased temporarily by 600 hours if the plant is oper¬ ated overtime. Overtime premium payments to workers and supervisors will increase direct labor and variable manufacturing support costs by 50% for all products. All other costs will remain unchanged. Is it worth¬ while operating the plant overtime? If the plant is operated overtime for 600 hours, what are the optimal production levels for the three products?(LO 2, 3)

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Cost Item Direct materials: AA100 COSTS PER TON AA101 AA102 Chemicals and fragrance AA100 Direct labor $560 $400 $470 0 800 800 60 30 60 Manufacturing support: Variable 60 30 60 Fixed 120 60 120 Total manufacturing costs $800 $1320 $1510 Selling support: Variable 20 30 30 Fixed 10 10 10 $830 $1360 $1550 Proposed sales level 300 tons 100 tons 75 tons Maximum demand 600 tons 400 tons 100 tons