Question

Pappy's Toys makes two models of a metal toy—Standard and DeLuxe. Both models are produced on a single machine. The price and costs of the two models appear as follows. Standard DeLuxe Price per unit $ 40 $ 60 Variable cost per unit $ 20 $ 24 Machine hours per unit 0.5 1.5 The one machine that used to produce both models has a capacity of 90,000 machine-hours per quarter. Fixed manufacturing costs per quarter are $800,000. Required: a. Suppose that the maximum unit sales in a quarter that Pappy's can achieve is 200,000 units of each product. How many units of each model should Pappy's produce in a quarter? b. Suppose that the maximum unit sales in a quarter that Pappy's can achieve is 120,000 units of each product. How many units of each model should Pappy's produce in a quarter?

Answer 1

See explanations below

Step-by-step explanation:

a. Contribution margin per hour

Standard

Selling price $40

Variable cost $20

Contribution margin. $20

Hour per unit. 0.5

Contribution margin per hour $10

Deluxe

Selling price $60

Variable cost. $24

Contribution margin $36

Hour per unit. 1.5

Contribution margin per hour $54

Optimum product mix

Standard 90,000 / 0.5 = 180,000 units

Deluxe. 0

Total. 90,000

Pappy should produce 180,000 units of standard and nil of deluxe.

b. Given the contribution margin per hour of $10 for standard and $54 for deluxe, the optimum product mix would be;

Standard 120,000 × 0.5 = 60,000 hours, 120,000 units

Deluxe 30,000 hours , 30,000/1.5= 20,000 units.

Total hours 90,000 hours

Therefore, Pappy should produce 120,000 units of standard and 20,000 units of deluxe.