Author Question: Product mix, constrained resource. Wechsler Company produces three products: A110, B382, and ... (Read 556 times)

cabate · **on:** Jul 6, 2018

Product mix, constrained resource.

Wechsler Company produces three products: A110, B382, and C657. All three products use the same direct material, Voxx. Unit data for the three products are:

The demand for the products far exceeds the direct materials available to produce the products. Voxx costs 6 per pound, and a maximum of 5,000 pounds is available each month. Wechsler must produce a minimum of 200 units of each product.

Required:
1. How many units of product A110, B382, and C657 should Wechsler produce?
2. What is the maximum amount Wechsler would be willing to pay for another 1,200 pounds of Voxx?

Question 2

Income from Services would be shown on the ______________.
a. debit side of the trial balance
b. credit side of the trial balance
c. not on the trial balance
d. on both the debit and credit side of the trial balance

ecabral0 · **Reply #1 on:** Jul 6, 2018

Answer to Question 1

1.
A110 B382 C657
Selling price 168 112 140
Variable costs:
Direct materials (DM) 48 30 18
Labor and other costs 56 54 80
Total variable costs 104 84 98
Contribution margin 64 28 42
Pounds of DM per unit 8 lbs. 5 lbs. 3 lbs.
Contribution margin per lb. 8 per lb. 5.60 per lb. 14 per lb.

First, satisfy minimum requirements.
A110 B382 C657 Total
Minimum units 200 200 200
Times pounds per unit 8 lb. per unit 5 lb. per unit 3 lb. per unit
Pounds needed to produce minimum units 1,600 lb. 1,000 lb. 600 lb. 3,200 lb.
The remaining 1,800 pounds (5,000 3,200) should be devoted to C657 because it has the highest contribution margin per pound of direct material. Because each unit of C657 requires 3 pounds of Voxx, the remaining 1,800 pounds can be used to produce another 600 units of C657. The following combination yields the highest contribution margin given the 5,000 pounds constraint on availability of Voxx.
A110: 200 units
B382: 200 units
C657: 800 units (200 minimum + 600 extra)

2. The demand for Wechsler's products exceeds the materials available. Assuming that fixed costs are covered by the original product mix, Wechsler would be willing to pay up to an additional 14 per pound (the contribution margin per pound of C657) for another 1,200 pounds of Voxx. That is, Wechsler would be willing to pay 6 + 14 = 20 per pound of Voxx for the pounds of Voxx that will be used to produce C657.1 If sufficient demand does not exist for 400 units (1,200 pounds 3 pounds per unit) of C657, then the maximum price Wechsler would be willing to pay is an additional 8 per pound (the contribution margin per pound of A110) for the pounds of Wechsler that will be used to produce A110. In this case Wechsler would be willing to pay 6 + 8 = 14 pound. If all the 1,200 pounds of Voxx are not used to satisfy the demand for C657 and A110, then the maximum price Wechsler would be willing to pay is an additional 5.60 per pound (the contribution margin per pound of B382) for the pounds of Voxx that will be used to produce B382. Wechsler would be willing to pay 5.60 + 6 = 11.60 per pound of Voxx.
1An alternative calculation focuses on column 3 for C657 of the table in requirement 1.
Selling price 140
Variable labor and other costs (excluding direct materials) 80
Contribution margin 60
Divided by pounds of direct material per unit 3 lbs.
Direct material cost per pound that Wechsler can pay without contribution margin becoming negative 20

Answer to Question 2

B