Problem 1: The Morton Company produces and sells two products, A and B, respectively. Financial data related to producing these two products are summarized as follows:
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Product A
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Product B
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Selling Price
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$10.00
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$12.00
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Variable Costs
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5.00
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10.00
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Fixed Costs
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$2000.00
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$600.00
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a) If these products are sold in the ratio of 4A for 3B, what is the break-even point?
b) If the product mix has changed to 5A for 5B, what would happen to the break-even point?
c) In order to maximize the profit, which product mix should be pushed?
d) If both products must go through the same manufacturing machine and there are only 30,000 machine hours available per period, which product should be pushed? Assume product A requires 0.5 hour per unit and B requires 0.25 per unit.
Short Case Study
The Hamilton Flour Company is currently operating its mill 6 days a week, 24 hours a day, on three shifts. The company could easily obtain a sufficient volume of sales at current prices to take the entire output of a seventh day of operation each week. The mill's practical capacity is 6,000 hundred weight of flour per day.
- Flour sells for $12.40 a hundredweight (cwt.) and the price of wheat is $4.34 a bushel. About 2.35 bushels of wheat are required per cwt. of flour. Fixed costs now average $4,200 a day, or $0.70 per cwt. The average variable cost of mill operation, almost entirely wages, is $0.34 per cwt.
- With Sunday operation, wages would be doubled for Sunday work, which would bring the variable cost of Sunday operation to $0.66 per cwt. Total fixed costs per week would increase by $420 (or $29,820) if the mill were to operate on Sunday.
a) Using the information provided above, compute the break-even volumes for 6-day and 7-day operation.
b) What are the marginal contribution rates for 6-day and 7-day operations?
c) Compute the average total cost per cwt. for 6-day operation and the net profit margin before taxes, per cwt.
d) Would it be economical for the mill to operate on Sundays? Justify your answer numerically.