Problem 4-71 (Algo) Optimum Product Mix (LO 4-4)

Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow.

	Basic			Classic			Formal
Sales price	$	26		$	66		$	150
Maximum annual demand (units)		21,000			11,000			31,000
Input requirement per unit
Direct material		0.6	yards		0.3	yards		0.8	yards
Direct labor		0.8	hours		3	hours		8	hours

Costs
Variable costs
Materials	$	15	per yard
Direct labor	$	11	per hour
Factory overhead	$	3	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	37,000
Marketing	$	8,500
Administration	$	31,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 40,000 direct labor-hours per year caused by the plant layout.

Required:

a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below

a-2. How much operating profit could the company earn if it were able to satisfy the annual demand?

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor.

b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?

c. Given the information in the problem so far, what product mix do you recommend?

d-1. Calculate the contribution margin for each type of dress shirt using the table below.

d-2. How much operating profit should your recommended product mix generate?

e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 10,500 more hours. The direct labor cost would increase from $11 to $14 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift?

Req A1 Req A2 Req B1 Req B1 Req B2 Req B2 Reg C Reg Di Req di Req D2 Reg E Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below Basic Classic Formal Total revenue Total variable costs Contribution margin Reg A1 Req A1 Reg A2 Reg A2 Reg B1 Req B1 Req B2 Req B2 Reg C Reg D1 Req D1 Reg D2 Reg D2 Reg E Req E How much operating profit could the company earn if it were able to satisfy the annual demand? Operating profit Req A1 Req A2 Req B1 Req B2 Reqc Req D1 Req D2 Req E Compute the contribution margin for each shirt per the constrained resource, direct labor. (Do not round intermediate calculations. Round your final answers to 3 decimal places.) Basic Classic Formal Contribution margin Req A1 Req A2 Req B1 1 Req B2 Reqc Reqc Reg Di Req di Req D2 Reg oz ReqE Which of the three product lines makes the most profitable use of the constrained resource, direct labor? O Classic O Basic Formal Req A1 Req A2 Req B1 Req B2 Reqc Reg D1 Reg D2 Req E Given the information in the problem so far, what product mix do you recommend? Classic and Basic Basic and Formal Classic and Formal Req A1 Req A2 Req B1 Req B2 ReqC Reg D1 Req D2 Req E Calculate the contribution margin for each type of dress shirt using the table below. Basic Classic Total revenue Less variable manufacturing costs: Total costs Contribution margin Req A1 Req A2 Req B1 Req B2 Reqc Reg D1 Req D2 Req E How much operating profit should your recommended product mix generate? Operating profit Reg AB Regaz Reg BIROQ B2 Reg C Reg Di Rep D2R E Req A1 Req A2 Req B1 Req B2 Reqc Req D1 Reg D2 Req E Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 10,500 more hours. The direct labor cost would increase from $11 to $14 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift? (Round your final answer to 2 decimal places.) Show less Austin should manufacture Additional profit would be