Edgerron Company is able to produce two products, G and available. with the same machine in its factory. The following information is Product G $ 50 10 $ 40 Product B $ 80 48 Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month $ 32 0.4 hours 600 units 1.0 hours 200 units The company presently operates the machine for a single eight-hour shift for 22 working days each month. Management is thinking about operating the machine for two shifts, which will increase its productivity by another eight hours per day for 22 days per month. This change would require $4,000 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.) Answer is complete but not entirely correct. 1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit 40.00 $ 32.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $ 100.00$ 32.00 Product B Total Product G 600 Maximum number of units to be sold 200 Hours required to produce maximum units 240 200 440 2. How many units of Product G and Product B should the company produce if it continues to operate with only one shift? How much total contribution margin does this mix produce each month? Product G Product B Total Hours dedicated to the production of each product 176 176 Units produced for most profitable sales mix 440 Contribution margin per unit $ 40.00 Total contribution margin-one shift $ 17,600 $ 17,600 3. If the company adds another shift, how many units of Product G and Product B should it produce? How much total incremental income would this mix produce each month? Should the company add the new shift? Product G Product B Total Hours dedicated to the production of each product 240 112 352 Units produced for most profitable sales mix 600 112 Contribution margin per unit $ 40.00 $ 32.00 Total contribution margin - two shifts $ 24,000 $ 3,584 $ 27,584 Total contribution margin-one shift 17,600 Change in contribution margin 9,984 Change in fixed costs 4,000 Change in operating income(loss) $ 5,984 Total incremental income $ 26,304 X Should the company add another shift? Yes 4. Suppose the company determines that it can increase Product G's maximum sales to 700 units per month by spending $3,000 per month in marketing efforts. Should the company pursue this strategy and the double shift? Compute total incremental income. Product G Product B Total 600 112 Second shift without marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $ 40.00 $ 32.00 $ 24,000 $ 3,584 $ 27,584 Additional fixed costs $ 4,000 Incremental income $ 26,304 700 72 $ 40.00 $ 32.00 Second shift with marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin Additional fixed costs Additional marketing costs $ 28,000 $ 2,304 $ 30,304 $ 4,000 $ 3,000 Incremental income $ 23,304 (3,000) $ Change in incremental income Should the company pursue this strategy and the double shift? No
