Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available. Product G $ 120 45 Product B $ 150 90 Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month $ 75 $ 75 $ 60 0.4 hours 500 units 1.0 hours 250 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 $7,500 additional fixed costs per month. (Round hours per unit answers to 1 decimal place. Enter operating losses, if any, as negative values.) 1. Determine the contribution margin per machine hour that each product generates. Product G Product B Contribution margin per unit $ 75.00 $ 60.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour 187.50 $ 60.00 Product G Product B Total Maximum number of units to be sold 500 250 Hours required to produce maximum units 200 250 450 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 176 0 176 440 0 Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - one shift $ 75.00 $ 0.00 $ 33,000 $ 33,000 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 200 152 352 Units produced for most profitable sales mix 500 152 Contribution margin per unit $ 75.00 $ 60.00 Total contribution margin - two shifts $ 37,500 $ 9,120 $ 46,620 Total contribution margin - one shift 33,000 Change in contribution margin 13,620 Change in fixed costs 7,500 Change in operating income(loss) $ 5,370 Total incremental income Should the company add another shift? Yes 4. Suppose the company determines that it can increase Product G's maximum sales to 600 units per month by spending $6,500 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 Additional fixed costs $ 75.00 $ 60.00 45,000 $ 6,720 $ $ 51,720 14,000 37,720 Incremental income $ 600 112 Second shift with marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $ 75.00 $ 60.00 45,000 $ 6,720 $ 51,720 14,000 Additional fixed costs $ Additional marketing costs No
