Edgerron Company is able to produce two products, G and B, with the same machine in its factory. The following information is available. Selling price per unit Variable costs per unit Contribution margin per unit Machine hours to produce 1 unit Maximum unit sales per month Product G $ 100 35 $ 65 0.4 hours 500 units Product B $ 130 78 $ 52 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 $6,500 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 $ 65.00 52.00 Machine hours per unit 0.4 1.0 Contribution margin per machine hour $ 162.50 $ 52.00 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 Hours dedicated to the production of each product Units produced for most profitable sales mix 440 Contribution margin per unit $ 65.00 52.00 X Total contribution margin - one shift $ 28,600 $ 0 $ 28,600 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 200 152 352 500 152 $ 65.00 52.00 $ 32,500 $ 7,904 $ 40,404 Hours dedicated to the production of each product Units produced for most profitable sales mix Contribution margin per unit Total contribution margin - two shifts Total contribution margin - one shift Change in contribution margin Change in fixed costs Change in operating income(loss) 28,600 11,804 6,500 $ 5,304 33,904 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 $5,500 per month in marketing efforts. Should the company pursue this strategy and the double shift? Compute total incremental income. Product G Product B Total 200 X 152 Second shift without marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin $ 65.00 $ 52.00 $ 13,000 7,904 $ Additional fixed costs $ 40,404 6,500 33,904 Incremental income $ 240 112 Second shift with marketing campaign: Units produced for most profitable sales mix Contribution margin per unit Contribution margin Additional fixed costs $ 65.00 $ 52.00 $ 15,600 $ 5,824 $ 42,744 X $ 6,500 Additional marketing costs $ 5,500 Incremental income $ 42,744 (3,160) X $ Change in incremental income Should the company pursue this strategy and the double shift? Yes
