Question

Handi-Tool Company manufactures and sells lawn and garden tools. Handi manufactures three kinds of pruning shears: Snip-It, Deluxe Clipper, and Limb-Away. The demand for the pruning shears is highest in April. Expecting this trend to continue, Handi is interested in how to best utilize available capacity. Given the following information, what combination of pruning shears should Handi-Tool produce?

Snip-It Deluxe Clipper Limb-Away
Demand 200,000 100,000 60,000
Unit Price $20 $30 $50
Unit variable cost $10 $15 $20
Unit contribution margin $10 $15 $30
Production rate (units per hour) 50 25 15
Available production hours 8,000 hrs
Total fixed costs $400,000

Answer 1

Snip-It: 4,000 hours

Limb-away: 4,000 hours

Income:

Contribution $500 x 4,000 + $450 x 4,000

less Fixed Cost: $400,000

Operating income: 3,400,000

Step-by-step explanation:

We will calculate the contribution margin per hour

We will set primary production to the higher contribution per hour then, the second and leftoer to the third product:

Snip-It:

$10 contribution per unit x 50 units per hour = $500

Deluxe Clipper:

$15 contribution x 25 units per hour = $375

Limb-away:

$30 contribution x 15 units per hour = $450

We will first do the 200,000 units of Snip-it

200,000 / 50 = 4,000 hours

Then, Limb-Away

60,000 / 15 = 4,000

As we complete our production hours we will not produce Dexule Clipper