Outward Rowing Company manufactures canoes and kayaks. Due to an increasing focus on fitness, the company has been experiencing an increased demand for its products. Two of its newer products, which are very popular with water sport enthusiasts, require a waterproofing process that can only be completed on machines that were recently purchased for this purpose. The machines have a maximum capacity of 12,000 machine hours, and no other products that the company makes use these machines.
Charlie Green, the company's operations manager, is preparing the production schedule for the coming month and can't seem to find enough machine time to produce enough units to meet the customer demand that the marketing department has included in the sales budget.
Mollie Beach, the company's controller, has gathered the following information about the two products:
| Selling price per unit | $ 200 | $ 244 |
| Direct materials | 80 | 60 |
| Direct labor | 16 | 32 |
| Variable overhead | 12 | 24 |
| Fixed overhead | 20 | 40 |
| Profit per unit | $ 72 | $ 88 |
| Unit sales demand | 8,000 | 14,000 |
| Machine hours per unit | 0.4 | 0.8 |
Required:
a.
Calculate the total number of machine hours needed to produce enough units to meet the sales demand for the two products.
b.
How should Charlie allocate the 12,000 available machine hours between the two productsso that Outward Rowing maximizes its profits?
c.
What total contribution margin will Outward Rowing realize based on your answer to (b)?
d.
Charlie has talked with the marketing department about the situation and suggested that the company raise the sales price on the kayak to $320 to reduce customer demand. Themarketing department believes that at the higher price, demand for this kayak will drop to 11,600 units. How should Charlie allocate the 12,000 machine hours based on this new information? What total contribution margin will Outward Rowing earn?
e.
After hearing about Charlie's recommendation to increase the kayak price to $320, Lon Clark, the sales manager, suggested that the company raise the price of the canoe instead. He believes that if the price is increased to $264, demand will fall to 4,000 units. How should Charlie allocate the 12,000 machine hours under Lon's proposal? What total contribution margin will Outward Rowing earn?
f.
Based on your answers to (c), (d), and (e), which action do you suggest that Outward Rowing take? Why?
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