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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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Product Mix Decision, Single Constraint

Norton Company produces two products (Juno and Hera) that use the same material input. Juno uses two pounds of the material for every unit produced, and Hera uses five pounds. Currently, Norton has 16,000 pounds of the material in inventory. All of the material is imported. For the coming year, Norton plans to import an additional 8,000 pounds to produce 2,000 units of Juno and 4,000 units of Hera. The unit contribution margin is $30 for Juno and $60 for Hera. Also, assume that Norton’s marketing department estimates that the company can sell a maximum of 2,000 units of Juno and 4,000 units of Hera.

Norton has received word that the source of the material has been shut down by embargo. Consequently, the company will not be able to import the 8,000 pounds it planned to use in the coming year’s production. There is no other source of the material.

Required:

  1. 1. Compute the total contribution margin that the company would earn if it could manufacture 2,000 units of Juno and 4,000 units of Hera.
  2. 2. Determine the optimal usage of the company’s inventory of 16,000 pounds of the material. Compute the total contribution margin for the product mix that you recommend.

1.

To determine

Calculate the amount of contribution margin if the company manufactures 2,000 units of Juno and 4,000 units of Hera.

Explanation

Contribution Margin:

Contribution margin can be defined as the amount left after deducting variable expense from sales revenue. It means the amount of sales revenue balance after covering variable expenses.

Use the following formula to calculate the total contribution margin:

Total contribution margin=(Number of units of Juno×Contribution margin per unit)+(Number of units of Hera×Contribution margin per unit)

Substitute 2,000 units for the number of units of Juno, $30 for the contribution margin for Juno, 4,000 units for the number of units of Hera, and $60 for the contribution margin for Hera in the above formula

2.

To determine

Calculate the optimal usage of the inventory of 16,000 pounds of materials. Also, calculate the total contribution margin for the product mix.

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