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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Use the following information for Exercises 8-47 and 8-48:

Billings Company produces two products, Product Reno and Product Tahoe. Each product goes through its own assembly and finishing departments. However, both of them must go through the painting department. The painting department has capacity of 2,460 hours per year. Product Reno has a unit contribution margin of $120 and requires 5 hours of painting department time. Product Tahoe has a unit contribution margin of $75 and requires 3 hours of painting department time. There are no other constraints.

8-48 Choosing the Optimal Product Mix with a Constrained Resource and a Demand Constraint

Refer to the information for Billings Company above. Assume that only 500 units of each product can be sold.

Required:

  1. 1. What is the optimal mix of products?
  2. 2. What is the total contribution margin earned for the optimal mix?

1.

To determine

Calculate the optimal mix of the products.

Explanation

Optimal Product Mix:

In order to increase the amount of revenue, small firms compute the optimal mix of the products and take advantage of their production capacity or strength and meet the needs of the customer.

The contribution margin of painting department time for Tahoe is $25 which is more than the contribution margin painting department time for Reno that is 24. Therefore, the machine time must be transferred to the production of Tahoe product until the production of 500 units are achieved and then shift to the production of Reno. Use the following formula to calculate the total units of Reno:

Units of Reno=Total painting department hours for RenoPainting department hours per unit

Substitute 960 hours for total painting department hours for Reno and 5 hours for the painting department hours in the above formula.

Units of Reno=960units5hours=192units

Therefore, the optimal mix of Tahoe and Reno is 500 units and 192 units respectively.

Working Notes:

1

2.

To determine

Calculate the contribution margin earned for the optimal mix.

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