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Additional Procesing Decision with a Production Constraint

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Mega Chemical Company produces ZylexA and a related product called Zylex B. Zylex B, which sells for $15.00 per gallon, is made from a base of ZylexA plus additional ingredients. It takes 25 minutes to manufacture a gallon of ZylexA and an additional 10 minutes to manufacture a gallon ZylexB. ZylexA sells for $9.00 per gallon. The cost per gallon of manufacturing ZylexA and the additonal cost to convert it into ZylexB are:

Material: ZylexA=$2.00 -- Additional Cost to Convert to ZylexB=$1.75
Labor: ZylexA=$2.50 -- Additional Cost to Convert to ZylexB=$0.50
VariableOverHead: ZylexA=$2.25 -- Additional Cost to Convert to ZylexB=$1.10.

Both products have been successful, and demand for both products is strong and beyond the company's capacity. Since it takes additional time to manufacture ZylexB, the president of production is trying to determine whether ZylexB should be produced.

A: Which product makes the largest contribution to company profit, given a capacity constraint measured in terms of production time?

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Solution Summary

The additional processing decisions with a production constraint is determined.

Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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