6-36 Capacity and product mix decision
Barney Toy Company manufactures large and small stuffed animals. It has a long-term contract with a large chain of discount stores to sell 3,000 large and 6,000 small stuffed animals each month. The following cost information is available for large and small stuffed animals.
Item Large Small
Price/Unit $32 $21
Direct Material $12 $10
Direct Labor $6 $2
Variable Support $2 $1
Fixed Costs Per Unit $3 $3
Total Unit Costs $23 $16
Estimated Demand 15,000 25,000
Production occurs in batches of 100 large or 200 small stuffed animals. Each batch takes a total of 10 machine hours to manufacture. The total machine hour capacity of 3,000 machine hours cannot be increased for at least a year.
a. Determine the contribution margin per unit for each of the two sizes of stuffed animals.
b. Determine which size is more profitable to produce. How many units of each size should Barney produce?
c. Because of an unexpected high demand for stuffed dinosaurs, the discount store chain has requested an additional order of 5,000 large stuffed dinosaurs. It is willing to pay $37 per dinosaur for this special order. Determine the opportunity cost associated with this order.
d. Should Barney Toy Company accept the order described in c.? Explain.
Constraint problems have a particular issue: some input is short!
Normally, you would produce the product that has the highest contribution margin (up to market demand).
But when you can't get enough of an input, this strategy may not maximize your profits.
You have to review the consumption habit of the products.
How do you do this?
You compute the ...
This solution shows how to analyze the problem posted and the decision criteria for accepting a special order.