90.2K

Verified Solution

Link Copied!

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	$	38		$	66		$	185
Maximum annual demand (units)		22,000			15,000			32,000
Input requirement per unit
Direct material		0.6	yards		0.2	yards		0.5	yards
Direct labor		0.8	hours		2	hours		7	hours

Costs
Variable costs
Materials	$	22	per yard
Direct labor	$	18	per hour
Factory overhead	$	3	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	54,000
Marketing	$	9,500
Administration	$	48,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 43,000 direct labor-hours per year caused by the plant layout.

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? (Round down "Units produced in Basics" to the nearest whole number.)

e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 19,000 more hours. The direct labor cost would increase from $18 to $22 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 down "Units produced" to nearest whole number and final answer to 2 decimal places.)

Basic Classic Total revenue Less variable manufacturing costs Total costs Contribution margin

Answer & Explanation Solved by verified expert

See Answer