Question
Product Mix Decision Aramis Aromatics Company sells its product AA100 to cosmetics companies for $940 per ton. The marketing manager is considering refining AA100 into
Product Mix Decision Aramis Aromatics Company sells its product AA100 to cosmetics companies for $940 per ton. The marketing manager is considering refining AA100 into finer perfumes. Product AA101 is expected to command a price of $1,500 per ton, and AA102, a price of $1,700. The maximum expected demand is 400 tons for AA101 and 100 tons for AA102. The annual plant capacity of 2,400 hours is fully utilized at present to manufacture 600 tons of AA100. The marketing manager proposed that Aramis sell 300 tons of AA100, 100 tons of AA101, and 75 tons of AA102 in the next year. It requires 4 hours of capacity to make 1 ton of AA100, 2 hours to refine 1 ton of AA100 further into AA101, and 4 hours to refine 1 ton of AA100 into AA102.
(c) Suppose a customer, Cosmos Cosmetics Company, is very interested in the new product AA101. It has offered to sign a long-term contract for 400 tons of AA101. It is also willing to pay a higher price if the entire plant capacity is dedicated to the production of AA101. What is the price for AA101 at which Aramis is indifferent between its current production of AA100 and dedicating its entire capacity to the production of AA101 for Cosmos?
(d) Suppose, instead, that the price of AA101 is $1,500 per ton and that the capacity can be increased temporarily by 600 hours if the plant is operated overtime . Overtime premium payments to workers and supervisors will increase direct labor and variable manufacturing overhead costs by 50% for all products. All other costs will remain unchanged. Is it worthwhile operating the plant overtime? If the plant is operated overtime for 600 hours, what are the optimal production levels for the three products?
AA products: COST ITEM Direct materials: Chemicals and fragrance AA100. Direct labor. Manufacturing overhead: Variable. Fixed.. Total manufacturing costs. Selling costs: Variable.. Fixed. Total cost Proposed sales level Maximum demand AA100 $560 0 60 60 120 $800 20 10 $830 300 tons 600 tons COSTS PER TON AA101 $ 400 800 30 30 60 $1,320 30 10 $1,360 100 tons 400 tons AA102 $ 470 800 60 60 120 $1,510 30 10 $1,550 75 tons 100 tons
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