Storeaway produces plastic storage bins for household storage needs. The company
ID: 2525915 • Letter: S
Question
Storeaway produces plastic storage bins for household storage needs. The company makes two sizes of bins: large (50 gallon) and regular (35 gallon). Demand for the product used to be so high that the company could sell as many of each size as it could produce. The same machinery is used to produce both sizes. The machinery is avaible for only 2,800 hours per period. The company can produce 12 Large bins every hour compared to 16 Regular bins in the same amount of time. Fixed expenses amount to $120,000 per period. Product mix data follows:Explanation / Answer
StoreAway
Product –Mix decision
Determination of the bin size that needs to be emphasized based on the constraint –
Machine hours is the constraint as the available MH = 2,800
As per the given info, the contribution margin per machine hour is as follows,
Regular = $86.40
Large = $69.60
Since the contribution margin per machine hour is higher for Regular, the company should emphasize on producing maximum units of Regular using the available machine hours. Next, the company would produce maximum possible units of Large with the remaining machine hours.
Hence, the optimal mix is determined as follows,
Total available machine hours = 2,800
Demand for Regular bins = 38,400 units
number of units produced per hour = 16
number of hours needed to produce 38,400 units = 38,400/16 = 2,400 hours
Remaining machine hours = 400
The number of Large bins that can be produced using 400 MHs,
Number of Large bins per machine hour = 12
Hence, number of Large bins produced using 400 hours = 12 x 400 = 4,800 units
Hence the optimal product mix is –
Regular 38,400 units
Large 4,800 units
Decision: StoreAway should produce 38,400 units of Regular size bins and 4,800 units of Large size bins.
StoreAway
Operating Income from Product Mix
Regular
Large
Total
Sales in units
38,400
4,800
contribution margin per unit
$5.40
$5.80
Total contribution margin
$207,360
$27,840
$235,200
Less: fixed expenses
$120,000
Operating Income
$115,200
Note – total contribution margin = sales in units x contribution margin per unit
Operating income is less than it was when StoreAway was producing its optimal product mix because
A – the company had to give up some of the Regular bin contribution margin per machine hour in order to produce Large bins. The annual demand for Regular bins is limited to 38,400 units. So, despite earning higher contribution margin per machine hour, the company cannot produce more than 38,400 units of Regular bin. Hence, the operating income is less than it was when the company was producing the optimal product mix.
StoreAway
Operating Income from Product Mix
Regular
Large
Total
Sales in units
38,400
4,800
contribution margin per unit
$5.40
$5.80
Total contribution margin
$207,360
$27,840
$235,200
Less: fixed expenses
$120,000
Operating Income
$115,200