Question

a. Comfy Co. makes three sizes of shirts, Small, Medium, and Large, on one assembly line that has a limit of 600 labor-hours per week. Comfy Co. can sell a maximum of 800 shirts of each size it can make under current operating capacity. Manufacturing information per shirt for each product is as follows:

  Small                 Medium                   Large

Selling price: $8 $12 $15

Variable costs: $5 $6 $8

Labor-hours per shirt: 0.4 0.5 1.0

How many shirts of each size should be produced and sold to maximize the income, and what is the total contribution margin?

b.

Video Co. manufactures two products, A and B. The following information was gathered:

A                        B

                                Selling price per unit                                  $54.00               $66.00

                                Variable cost per unit                                   39.00                 54.00

                                Total fixed costs                                                    $25,000

Video Co. manufactures and sells three units of A for every two units of B. If the company sold 1,500 units of A, it would report operating income (loss) of:

$22,500

$9,500

$(25,000)

$34,500

Answer 1

a.

	Small	Medium	Large
Selling price	$8	$12	$15
Variable cost	5	6	8
Contribution margin per shirt	3	6	7
Labor hours per shirt	0.4	0.5	1.0
Contribution margin per labor hour	7.5	12	7
Rank	2	1	3
Hours required to produce shirt	320 (800*0.4)	400 (800*0.5)	800 (800*1.0)
Maximum Hours allowed	200	400	0
Shirts to be produced to earn maximum income	500 (800/320*200)	800
Total contribution margin	1,500 (200*$7.5)	4,800 (400*$12)

Total contribution margin = $1,500+4,800 = $6,300

b.

Units sold for product A = 1,500 units

Units sold for product B = 1,500/3*2 = 1,000 units

Sales (1,500*$54)+(1,000*$66)	$147,000
Less: Variable costs (1,500*$39)+(1,000*$54)	112,500
Contribution margin	34,500
Less: Fixed costs	25,000
Operating income	$9,500

Hence option $9,500 is correct.