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Product decisions under bottlenecked operations Mill Metals Inc. has three grades of metal product. Type 5, Type 10, and Type 20. Financial data for the three grades are as follows: Type 5 Type 10 Type 20 Revenues $43,000 $49,000 $56,500 Variable cost $34,000 $28,000 $26,500 Fixed cost 8,000 8,000 8,000 Total cost $42,000 $36,000 $34,500 Income from operations $ 1,000 $13,000 $22,000 Number of units ÷ 5,000 ÷ 5,000 ÷ 5,000 Income from operations per unit $ 0.20 $ 2.60 $ 4.40 Mill's operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows: Type 5: 6 hours Type 10: 6 hours Type 20: 12 hours The Marketing Department is considering a new marketing and sales campaign. Which product should be emphasized in the marketing and sales campaign in order to maximize profitability?

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 25, Problem 25.21EX
Textbook Problem

Product decisions under bottlenecked operations

Mill Metals Inc. has three grades of metal product. Type 5, Type 10, and Type 20. Financial data for the three grades are as follows:

  Type 5 Type 10 Type 20
Revenues $43,000 $49,000 $56,500
Variable cost $34,000 $28,000 $26,500
Fixed cost 8,000 8,000 8,000
Total cost $42,000 $36,000 $34,500
Income from operations $ 1,000 $13,000 $22,000
Number of units ÷ 5,000 ÷ 5,000 ÷ 5,000
Income from operations per unit $ 0.20 $ 2.60 $ 4.40

Mill's operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows:

Type 5: 6 hours
Type 10: 6 hours
Type 20: 12 hours

The Marketing Department is considering a new marketing and sales campaign.

Which product should be emphasized in the marketing and sales campaign in order to maximize profitability?

Expert Solution
To determine

Production Bottleneck: Production Bottleneck is a situation of constraint in the manufacturing company, where the demand for goods is higher, than the production capacity of the company. In this situation the production or contribution per bottleneck hour is calculated to determine the value of a product.

To Determine: The product which should be emphasized to generate maximum profit.

Explanation of Solution

Company MM produces 3 products, Type 5, Type 10 and Type 20. The unit contribution per unit of Type 5 is $1.80, of Type 10 is $4.20 and Type 20 is $6.00. However the production time of the products helps in determining the product with greater income. It is stated that Type 5 and Type 10 require 6 furnace hours and Type 20 needs 12 furnace hours...

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Chapter 25 Solutions

Accounting
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