Question

Sung Company is able to produce two products, R and T, with the same machine in its factory. The following

information is available.

Product R Product That I

Selling price per unit \(60 \)80

Variable costs per unit . 20 45

Contribution margin per unit . \(40 \)35

Machine hours to produce 1 unit 0.4 hours 1.0 hours

Maximum unit sales per month . 550 units 175 units

The company presently operates the machine for a single eight-hour shift for 22 working days each month.

Management is thinking about operating the machine for two shifts, which will increase its productivity

by another eight hours per day for 22 days per month. This change would require \(3,250 additional fixed

costs per month.

Required

1. Determine the contribution margin per machine hour that each product generates.

2. How many units of Product R and Product T should the company produce if it continues to operate

with only one shift? How much total contribution margin does this mix produce each month?

3. If the company adds another shift, how many units of Product R and Product T should it produce?

How much total contribution margin would this mix produce each month? Should the company add

the new shift? Explain.

4. Suppose that the company determines that it can increase Product R’s maximum sales to 675 units per

month by spending \)4,500 per month in marketing efforts. Should the company pursue this strategy

and the double shift? Explain.

Short answer

When the company chooses two shifts and a marketing campaign the operating loss of the company is $4,500.

Step-by-step solution

Definition of net loss

The net loss is the amount when the cost and expenses of the product are greater than the sales revenue

Contribution margin per machine hour

	Product R	Product T	Total
Contribution Margin Per Unit	$40	$35
Machine Hours Per Unit	$0.40	$1
Contribution Margin Per Machine Hour	$100	$35
	Product R	Product T	Total
Maximum Number of units to be sold	550	175
Hours Required to maximum units	137.5	175	$312.5

Contribution margin per shift

	Product R	Product T	Total
Hours Dedicated to the production of each product	176		176
Units produced for the most profitable Sales mix	395
Contribution Margin per unit	$40
Total Contribution margin per shift	$15,800		$15,800

Contribution margins with two shifts

	Product R	Product T	Total
Hours Dedicated to the production of each product	220	132	352
Units produced for the most profitable Sales mix	550	132
Contribution Margin per unit	$40	$35
Total Contribution margin of two shifts	$22,000	$4,620	$26,620
Less: Total Contribution Margin- One shift			$15,800
Change in contribution margin			$10,820
Less: Change in Fixed Cost			($3,250)
Change in operating income			$7,750
Should the company add another shift?	Yes

Contribution margin with marketing campaigns

	Product R	Product T	Total
Hours Dedicated to the production of each product	270	82	352
Units produced for the most profitable Sales mix	675	82
Contribution Margin per unit	$40	$35
Total Contribution margin- Two shifts and marketing campaigns	$27,000	$2,870	$29,870
Less: Total Contribution Margin- Two shifts without marketing campaigns			$26,620
Change in contribution margin			3,250
Additional marketing cost			$4,500
Less: Change in fixed cost			$3,250
Change in operating income			($4,500)
Should the company add another shift?	No