Question

Chef Gourmet, Inc., has assembled the following data pertaining to its two most popular products.

	Blender			Food Processor
Direct material	$	25		$	43
Direct labor		19			32
Manufacturing overhead @ $52 per machine hour		52			104
Cost if purchased from an outside supplier		67			115
Annual demand (units)		27,000			32,000

     Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $40. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1.	If 53,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?

       

2.	With all other things constant, if management is able to reduce the direct material for a food processor to $25 per unit, how many units of each product should be manufactured? Purchased?

       

Answer 1

	Blender	Food Processor
Direct material	$25	$43
Direct labor	$19	$22
Manufacturing overhead @ $52 per machine hour	$12	$24
	(52-40)
Total relevant cost	$56	$89
No. of machine hours avaiable			53000
Total required	27000	64000
	(27000*1)	(32000*2)
	Blender	Food Processor
Manufacture	27000	13000
		(53000-27000)/2
Purchase	0	19000
		(32000-13000)
ans 2
	Blender	Food Processor
Direct material	$25	$25
Direct labor	$19	$22
Manufacturing overhead @ $52 per machine hour	$12	$24
	(52-40)
Total relevant cost	$56	$71
	Blender	Food Processor
Manufacture	0	26500
		(53000/2)
Purchase	27000	5500
		(32000-26500)