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OJ Plantation (OJP) produces a product that can be sold at end of Extraction Process or processed further, in Mixing Process, and then sold.
OJ Plantation (OJP) produces a product that can be sold at end of Extraction Process or processed further, in Mixing Process, and then sold. Currently, the total output of Extraction Process can be sold at a price of RM2 per kilogram. The output of Mixing Process has in the past sold for RM7.00 per kilogram. However, due to the seasonal demand, the selling price of the output from Mixing Process has recently dropped to RM6.80 per kilogram on average. Information about unit selling price and costs: Selling price per unit Unit costs: Direct materials Direct labour Manufacturing overhead Transferred-in variable costs from Extraction Process Output from Extraction Process RM3.00 1.50 0.40 0.60 Output from Mixing Process RM7.00 2.00 0.60 1.00 1.90 All manufacturing overhead costs are fixed and are allocated to units produced based on processing hours of capacity used. Total capacity of processing hours available are 100,000 and is interchangeable between the two processes. The products are produced in batches of 50 units in each process. Each batch of output from Extraction Process requires 2 hour of processing and each batch of output from Mixing Process requires 3 additional hours of processing. Required: a) Assume that the per-unit selling price for output from Mixing Process for the coming year is expected to be RM7.00. Determine the contribution margin per processing hour for output from Extraction Process and Mixing Process. What is the implication of this information if the goal of the company is to maximize short-term operating income? (8 marks) b) Determine the lowest acceptable selling price per unit for the output from Mixing Process to make this output (in total) as profitable (in total) as the output from Extraction Process? (2 marks) c) Supposed that 50 percent of the manufacturing overhead costs are variable. Determine the contribution margin per processing hour for output from Extraction Process and Mixing Process. What is the implication of this information if the goal of the company is to maximize short-term operating income? (10 marks)
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