Mickey Company manufactures three different sizes of stuffed teddy bears (large,
ID: 341274 • Letter: M
Question
Mickey Company manufactures three different sizes of stuffed teddy bears (large, small and medium d corresponding costs for the month of January 2004 are given below: large medium small projected unit sales 3,000 5,000 4,000 $ $ $ price per unit 40 30 20 variable cost per unit --direct material 12 10 8 --direct labour 8 5 3 --support costs 5 3 2 fixed cost per unit 2 2 2 total unit cost 27 20 15 It takes 20, 15 and 10 machine hours to manufacture 100 units of large, medium and small teddy bears, respectively. The company has a monthly machine hour capacity of 2,050 machine hours and this machine hour capacity cannot be increased for at least a year. Required: b) Determine how many units Mickey Company should produce of each size to maximise its profits c) Suppose that a foreign firm has offered to buy 2,000 large teddy bears at $45 each. Determine the opportunity costs for this order. d) Suppose that the available machine hour capacity is reduced to 1,550 machine hours due to machine break down. How many units of each size should Mickey Company produce to maximise its profits?
Explanation / Answer
b)
Since total trequirement for machine hours is only 1750 and available machine hours is 2000, required no. of units can be produced.
c)
Surplus Capacity = 2000 - 1750 = 250 Machine Hours
Machine Hours required for producing additional 2000 large teddy bears = 2000 * 0.20 = 400 machine hours
Thus in order to produce additional 2000 large teddy bears, more 150 machine hours (400 - 250) will be required and thus production of small teddy bears is to be reduced by 150 machine hours.
Contribution margin foregone due to allocation of 150 machine hours for production of additional large teddy bears = 150 MH * 70 (CM per MH) = 10,500
Contribution foregone of $ 10,500 shall be opportunity cost for the order
d)
Large Medium Small Projected Sales (Units) 3000 5000 4000 Selling Price 40 30 20 Variable Cost: Direct Material (12) (10) (8) Direct Labour (8) (5) (3) Support Costs (Considered as variable cost) (5) (3) (2) Contribution margin per unit 15 12 7 Machine Hours required per unit 0.2 0.15 0.1 Contribution margin per machine hour 75 80 70 Ranking for production 2nd 1st 3rd Machine Hours required for projected sales 600 750 400 Machine Hours allocated 600 750 400 Units Produced 3000 5000 4000