A6	EX4
Selling price	$90	$160
Variable manufacturing cost per unit	$40	$110
Variable marketing cost per unit	$18	$23
Budgeted total fixed overhead costs	$325,000	$505,000
Hours required to produce one unit on the regular machine	1.0	0.5

Additional information includes the following:

a.

SimonSimon

faces a capacity constraint on the regular machine of 50,000 hours per year.

b. The capacity of the high-precision machine is not a constraint.

c. Of the

$ 505 comma 000$505,000

budgeted fixed overhead costs of EX4,

$ 225 comma 000$225,000

are lease payments for the high-precision machine. This cost is charged entirely to EX4 because

SimonSimon

uses the machine exclusively to produce EX4. The company can cancel the lease agreement for the high-precision machine at any time without penalties.

d. All other overhead costs are fixed and cannot be changed.

Requirement 1. What product

mixminusthat

is, how many units of A6 and

EX4minuswill

maximize

Simon's

operating income? Show your calculations. (Enter an amount in each input cell including zero balances.)

Begin by calculating the benefit from only selling A6 or EX4.

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		A6	EX4
Contribution margin per unit		32	27
x	Hours of constrained resource	1.0	0.5
Total contribution margin		1,600,000	2,700,000
Less:	Lease costs of the high-precision machine	0	225,000
Net relevant benefit		1,600,000	2,475,000

Simon

should use its capacity to produce

EX4

EX4

A6

since the net relevant benefit is

lower

higher

lower

. The additional contribution from selling EX4 rather than A6 is

not enough

enough

not enough

to cover the additional costs of leasing the high-precision machine.Requirement 2. Suppose

Simon

can increase the annual capacity of its regular machines by

14,000

machine-hours at a cost of

$70,000.

Should

Simon

increase the capacity of the regular machines by

14,000

machine hours? By how much will

Simon's

operating income increase or decrease? Show your calculations.

Begin by calculating the benefit from only selling A6 or EX4 with the increased capacity of the regular machine. (Enter an amount in each input cell including zero balances.)

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		A6	EX4
Contribution margin per unit		32	27
x	Hours of constrained resource	1.0	0.5
			28,000
Less:
	Cost of increasing capacity
Net relevant benefit

Should Simon

increase the capacity of the regular machines by

14,000

machine hours? By how much will

Simon's

operating income increase?

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Simon		increase the capacity of the regular machine by 14,000 machine hours. Simon's operating
income will increase by $			.

Requirement 3. Suppose that the capacity of the regular machines has been increased to

64,000

hours.

SimonSimon

has been approached by Ward

Corporation to supply

25,000

units of another cutting tool, V2, for

$127

per unit.

Simon

must either accept the order for all

25,000

units or reject it totally. V2 is exactly like A6 except that its variable manufacturing cost is

$50

per unit. (It takes one hour to produce one unit of V2 on the regular machine, and variable marketing cost equals

$ 18$18

per unit.) What product mix should

Simon

choose to maximize operating income? Show your calculations.First, determine the amount that should be used to determine if

Simon

should accept

Ward's

order.

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		A6	EX4	V2

Simon

should

should not

accept

Ward's

order.Next, determine the product mix for A6 and EX4 that will maximize operating income along with the decision you made about

Ward's

order. (Enter an amount in each input cell including zero balances.)

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		A6	EX4
x	Hours of constrained resource
Less:
Net relevant benefit

What product mix should

Simon

choose to maximize operating income? (Enter an amount in each input cell, including zero balances.)

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Based on the above calculations, the product mix that maximizes operating income is				units of V2,
units of A6, and		units of EX4.