Question

Henry Inc., a manufacturing firm, is able to produce 1,000 pairs of sneakers per hour, at maximum efficiency. There are three eight-hour shifts each day. Due to unavoidable operating interruptions, production averages 800 units per hour. The plant actually operates only 27 days per month. Based on the current budget, Henry estimates that it will be able to sell only 500,000 units due to the entry of a competitor with aggressive marketing capabilities. But the demand is unlikely to be affected in future and will be around 515,000. Assume the month has 30 days. What is the master-budget capacity utilization level for this budget period

Answer 1

The master-budget capacity utilization level for Henry Inc. during this budget period is approximately 96.45%, calculated by dividing the estimated sales of 500,000 units by the actual monthly production of 518,400 units.

Step-by-step explanation:

To calculate the master-budget capacity utilization level for Henry Inc., we need to determine the firm's total potential production and compare it to the expected sales based on their current budget.

The plant's full capacity in units per hour is 1,000 pairs of sneakers, with three 8-hour shifts each day. Therefore, the daily full capacity is 1,000 units/hour * 24 hours = 24,000 units. Over a month of 30 days, this equates to 24,000 units/day * 30 days = 720,000 units at full capacity.

However, because of operating interruptions, the average production is 800 units per hour. So, the adjusted daily production is 800 units/hour * 24 hours = 19,200 units. Given the plant operates only 27 days per month, the monthly production then is 19,200 units/day * 27 days = 518,400 units.

Henry Inc. estimates that it will sell 500,000 units. To find the capacity utilization rate, we divide the estimated sales by the actual monthly production: 500,000 units / 518,400 units = 0.9645, or 96.45% after multiplying by 100. This means the master-budget capacity utilization level for this budget period is approximately 96.45%.