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Chef Gourmet, Inc: Production Decisions; Limited Capacity

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

Blender Food Processor

Direct Material $18 $33
Direct Labor 12 27
Manufacturing overhead@ $48 per machine hour 48 96
Cost if purchased from an outside supplier 60 114
Annual demand (units) 20,000 28,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $30. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1. If 50,000 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 $18 per unit, how many units of each product should be manufactured? Purchased?

3. Build a spreadsheet: Construct an Excel spreadsheet to solve requirement (1) above. Show how the solution will change if the following information changes: the unit cost if purchased from an outside supplier is $66 for the blender and $120 for the food processor.

Solution Preview

See the attached file.

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

Blender Food Processor

Direct Material $18 $33
Direct Labor $12 $27
Manufacturing overhead@ $48 per machine hour $48 $96
Cost if purchased from an outside supplier $60 $114
Annual demand (units) 20,000 28,000

Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $30. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.

Required:

1. If 50,000 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?
First, let us take a make or buy decision.
Cost of making
Blender Food Processor
Direct Material $18.00 $33.00
Direct Labor $12.00 $27.00
Manufacturing overhead@ $48 per machine hour $48.00 $96.00 ...

Solution Summary

This solution provides a detailed, step by step explanation of the given accounting question.

$2.19