Apple, Inc. is one of the world’s largest companies in terms of market capitalization. The company recently reported quarterly earnings that exceeded Wall Street’s expectations. However, management is concerned about the next quarter and year, primarily related to the effects of the Coronavirus on the production of three product lines in its Chinese factories: iPhones, Macs/iPads, and AirPods. In particular, senior leadership predicts that the virus may reduce the number of workers available to operate machines and therefore impose a constraint on operator hours, which are used across iPhones, Macs/iPads, and AirPods. The Coronavirus is expected to limit the number of operator hours available to 1.15 billion for 2020. As the figures below show, this number of operator hours is not large enough to allow Apple to fill the maximum 2020 demand for all three product lines.

The following are projections for the calendar year 2020 (except for 2019 production volume). Direct materials and direct labor are variable costs. Estimated service cost is also a variable cost that represents anticipated service commitments over the useful life of the product.

The fixed overhead (per unit) is the result of allocating total fixed costs, which relates entirely to production costs, across product lines based on relative sales value and 2019 production levels. Assume that total fixed costs are not expected to change between 2019 and 2020.

	iPhone	Mac/iPad	AirPods
Dollars amounts are per unit
Average sales revenue	$800	$1,200	$160
Direct materials	$160	$380	$25
Direct labor	$60	$140	$15
Estimated service cost	$50	$90	$0
Allocated fixed overhead	$170	$255	$34
2019 production volume (millions)	150	39	41
Maximum 2020 demand (millions)	155	38	62
Operator hours per unit	5	9	2

(For each question, calculate product mix and operating income for the year 2020, as applicable)

1. Apple routinely emphasizes gross margin percentage as one of its key performance indicators both internally and in external reports and communications (e.g., press releases, conference calls). In turn, the company’s current approach is to allocate constrained resources to products based on gross margin percentage as it believes this will maximize net operating income. Calculate the gross margin percentage for each product.
2. Suppose that when total production is constrained, Apple chooses its product mix by filling demand for products with the highest gross margin percentage and leaving some demand unfilled for products with the lowest gross margin percentage. What mix of products would Apple produce under this approach and what would operating income be for this mix?
3. Despite Apple’s internal and external emphasis on gross margin percentage, you are skeptical that this emphasis is the best way to make product mix decisions when production is constrained assuming the goal is to maximize profit. Suggest a better way to determine the product mix that maximizes profit. Then calculate this alternative product mix, the operating income for this mix, and compare operating income to the amount calculated in question 2.
4. Apple is also concerned with assessing what will happen if the effects of the Coronavirus on available operator hours is larger or smaller than the amount reflected in the original estimate of 1.15 billion hours. Answer the following, assuming that under either alternative the product mix will be adjusted to maximize profitability:
   1. how much would operating income decrease if the number of available hours is 50 million hours lower than the original estimate, so that the total available hours are 1.10 billion hours?
   2. how much would operating income increase if the number of available hours is 100 million hours higher than the original estimate, so that the total available hours are 1.25 billion hours?