HOMEWORK

Cindhy Chamorro BV8APY

1. Our company produces 4 totally different products. The total volume of the production is 54 000, and the
exact quantity for the products can be calculated by using the following ratios: 4:3:7:6

Product Pric AVC

e
1. 14 8
2. 18 16
3. 14 9
4. 12 8

The total fix cost of the company is 140 000 and the allocation base is the Quantity.
a) Decide to produce the products or do we have to drop one of them? Please explain your
answer.

To decide whether to produce all four products or drop one of them, we'll calculate the contribution margin
for each product and compare it to the fixed costs.

Contribution Margin = (Selling Price - Average Variable Cost)

Calculate the contribution margin for each product:

Product 1: $14 - $8 = $6
Product 2: $18 - $16 = $2
Product 3: $14 - $9 = $5
Product 4: $12 - $8 = $4
Now, calculate the contribution margin weighted by the production ratios (4:3:7:6). This gives us the
average contribution margin for the entire product mix:

Average Contribution Margin = (4/20 * $6) + (3/20 * $2) + (7/20 * $5) + (6/20 * $4)
Average Contribution Margin = $3.10 per item

Now, calculate the total contribution margin for the entire production of 54,000 items:

Total Contribution Margin = Average Contribution Margin * Total Production Volume

Total Contribution Margin = $3.10 * 54,000 = $167,400

Ans: The total contribution margin ($167,400) is greater than the fixed costs ($140,000), so it is profitable
to produce all four products. You do not need to drop any products.
 b) We have 15 000 for advertisement. The highest efficiency we have if just one product is
promoted. Due to the Ad. the selling quantity of that product will increase by 20 %.
Which is the best choice for us? What will be the change in the profit after advertising?

To determine which product to promote with a $15,000 advertising budget and a 20% increase in selling
quantity, calculate the additional contribution margin for each product after advertising.

Additional Contribution Margin = (20% increase in quantity) * (Selling Price - Average Variable Cost)

For each product, calculate the Additional Contribution Margin. Then, compare them and choose the product
with the highest Additional Contribution Margin.

Let's calculate the Additional Contribution Margin for each product:

For Product 1: 0.20 * ($14 - $8) = $1.20

For Product 2: 0.20 * ($18 - $16) = $0.40
For Product 3: 0.20 * ($14 - $9) = $1.00
For Product 4: 0.20 * ($12 - $8) = $0.80
Product 3 has the highest Additional Contribution Margin of $1.00. So, you should promote Product 3.

To calculate the change in profit, subtract the additional advertising cost from the additional contribution margin
and multiply by the increased quantity:

Change in Profit = ($1.00 - $15,000) * 0.20 = (-$14,999) * 0.20 = -$2,999.80

Ans: Promoting Product 3 with the advertising budget would result in a decrease in profit of approximately
$2,999.80.

c) One of our machines is out of order and we are not able to produce all the amounts from
every product. Please decide on the best production program, if we have limited time
50 000 hours.
Production time of different products:
- 1.: 1,5 hours/item
- 2.: 2 hours/item
- 3.: 1 hour/item
- 4.: 2 hours/item
Calculate the change in profit.
To determine the best production program with a limited time of 50,000 hours and the given production times for
each product, we need to calculate the contribution margin per hour for each product and then optimize the
production quantities within the time constraint.
Let's calculate the contribution margin per hour for each product:

Product 1:
Contribution Margin per Hour = Contribution Margin / Production Time per Item
Contribution Margin per Hour = ($6) / (1.5 hours/item) = $4 per hour

Product 2:
Contribution Margin per Hour = Contribution Margin / Production Time per Item
Contribution Margin per Hour = ($2) / (2 hours/item) = $1 per hour

Product 3:
Contribution Margin per Hour = Contribution Margin / Production Time per Item
Contribution Margin per Hour = ($5) / (1 hour/item) = $5 per hour

Product 4:
Contribution Margin per Hour = Contribution Margin / Production Time per Item
Contribution Margin per Hour = ($4) / (2 hours/item) = $2 per hour

Now, you have a limited time of 50,000 hours. To maximize profit within this time constraint, you should
produce the product with the highest contribution margin per hour until you reach the time limit.

Start by producing Product 3 because it has the highest contribution margin per hour ($5 per hour).
After that, produce Product 1 because it has the second-highest contribution margin per hour ($4 per hour).
Finally, if there's still time available, produce Product 4 ($2 per hour).
Calculate the maximum quantities you can produce based on the time constraint:

Product 3: 50,000 hours / 1 hour/item = 50,000 items

Product 1: 50,000 hours / 1.5 hours/item ≈ 33,333 items
Product 4: 50,000 hours / 2 hours/item = 25,000 items
Now, let's calculate the change in profit compared to the original production:

Original Profit = Total Contribution Margin - Fixed Costs

Original Profit = $167,400 - $140,000 = $27,400

New Profit (with the optimized production):

 New Profit = (Contribution Margin per Hour of Product 3 * Quantity of Product 3) + (Contribution
Margin per Hour of Product 1 * Quantity of Product 1) + (Contribution Margin per Hour of Product 4 *
Quantity of Product 4) - Fixed Costs

New Profit = ($5 per hour * 50,000 items) + ($4 per hour * 33,333 items) + ($2 per hour * 25,000 items) -
$140,000

Calculate the New Profit to find the change in profit:

New Profit = $250,000 + $133,332 + $50,000 - $140,000

New Profit = $293,332

The change in profit with this optimized production program is:

Change in Profit = New Profit - Original Profit

Change in Profit = $293,332 - $27,400 = $265,932

Ans: So, by optimizing the production program within the time constraint, your profit would increase by
approximately $265,932.

d) We again have 15 000 for advertising. The promotion has the same effect as in exercise
b). Which is the best choice for us?

Calculate the Additional Contribution Margin for each product with the advertising effect:
Additional Contribution Margin = (20% increase in quantity) * (Selling Price - Average Variable
Cost)
Let's calculate the Additional Contribution Margin for each product:
For Product 1:
Additional Contribution Margin = 0.20 * ($14 - $8) = $1.20
For Product 2:
Additional Contribution Margin = 0.20 * ($18 - $16) = $0.40
For Product 3:
Additional Contribution Margin = 0.20 * ($14 - $9) = $1.00
For Product 4:
Additional Contribution Margin = 0.20 * ($12 - $8) = $0.80

Choose the product with the highest Additional Contribution Margin. In this case, Product 3 has the highest
Additional Contribution Margin of $1.00.
Calculate the change in profit. To do this, you need to subtract the advertising cost from the Additional
Contribution Margin and then multiply it by the increased quantity:
Change in Profit = (Additional Contribution Margin - Advertising Cost) * (20% increase in quantity)

Change in Profit = ($1.00 - $15,000) * 20% = (-$14,999) * 0.20 = -$2,999.80

Ans: So, if you choose to promote Product 3 with the $15,000 advertising budget, your profit would
decrease by approximately $2,999.80 due to the advertising cost.