Question

hoosing the Optimal Product Mix with a Constrained Resource and a Demand Constraint

Billings Company produces two products, Product Reno and Product Tahoe. Each product goes through its own assembly and finishing departments. However, both of them must go through the painting department. The painting department has capacity of 2,460 hours per year. Product Reno has a unit contribution margin of $120 and requires five hours of painting department time. Product Tahoe has a unit contribution margin of $75 and requires three hours of painting department time. There are no other constraints.

Assume that only 500 units of each product can be sold.

Required:

1. What is the optimal mix of products? If required, round your answers to the nearest whole number.

	Optimal Mix
Reno	units
Tahoe	units

2. What is the total contribution margin earned for the optimal mix?
$

Answer 1

1) Reno 192 units

Tanhoe: 500 units

Working: When 500 units of each product can be sold, the company will first complete and sell 500 units of Tahoe, which will take 500 units * 3 hours = 1,500 hours of painting department time, The remaining 960 hours (=2,460 -1,500) hours would be utilised for the production of Reno, thus yielding 192 units of Reno

2) Total contribution margin earned for the optimal mix : $60,540

Working: ($120 * 192) + ($75 * 500) =$60,540