Situation Three

Rutro Corp. makes three products in a single facility. These products have the following unit product costs:

Product A Product B Product C

Direct material $32.00 $40.00 $42.00

Direct labor 22.00 20.00 16.00

Variable manufacturing overhead 6.00 8.00 15.00

Fixed manufacturing overhead 29.00 38.00 28.00

Unit cost $89.00 $106.00 $101.00

Additional data concerning these products are listed below:

Product A Product B Product C

Mixing minutes per unit 3 4 2

Selling price per unit $105.00 $124.00 130.00

Variable selling cost per unit $10.00 $8.00 $9.00

Monthly demand in units 5,500 4,300 3,800 The mixing machines are potentially the constraint in the production facility. A total of 40,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Required:

• How many minutes of mixing machine time would be required to satisfy demand for all three products?
• What is the contribution margin per minute individually for Products A, B, and C?

• Using only the available 40,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Rounddownto the nearest whole units.)

• Is there unmet demand for product(s)? If so, how much and for which product(s)?

• Assume there is unmet product demand. How much in total should Rutro be willing to pay for additional machine time?

• Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

• Is there anything misleading about the figure given for fixed manufacturing overhead?

• What is the significance of contribution margins with respect to determining how much of each product to produce to maximize profit?

• What is the significance of contribution margins with respect to determining how much Rutro should pay for additional machine time?

• Why isnt sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?