Question

Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow:

   Basic    Classic    Formal   
Sales price    $    44        $    77        $    225       
Maximum annual demand (units)        24,000            17,000            34,000       
Input requirement per unit                                       
Direct material        0.6    yards        0.4    yards        0.6    yards   
Direct labor        0.9    hours        2    hours        7    hours   

Costs           
Variable costs           
Materials    $    24    per yard
Direct labor    $    20    per hour
Factory overhead    $    4    per direct labor-hour
Marketing        10    % of sales price
Annual fixed costs           
Manufacturing    $    56,000   
Marketing    $    10,500   
Administration    $    50,000   

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 52,000 direct labor-hours per year caused by the plant layout.

Required:

a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of dress shirt using the table below

a-2. How much operating profit could the company earn if it were able to satisfy the annual demand?

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor. (Do not round intermediate calculations. Round your final answers to 3 decimal places.)

b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?

   Classic
   Basic
   Formal

c. Given the information in the problem so far, what product mix do you recommend?

   Classic and Basic
   Basic and Formal
   Classic and Formal

d-1. Calculate the contribution margin for each type of dress shirt using the table below.

d-2. How much operating profit should your recommended product mix generate? (Round down "Units produced in Basics" to the nearest whole number.)

e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 20,000 more hours. The direct labor cost would increase from $20 to $23 per hour for all hours of direct labor used during the additional shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift? (Round down "Units produced" to nearest whole number and final answer to 2 decimal places.)

Austin should manufacture:

Additional profit would be:

Answer 1