Acct 3210 HW3

11-43
1.
A6 ($) EX4 ($)
Selling Price 180 280
Variable manufacturing cost (110) (190)
Variable marketing cost (20) (60)
Contribution Margin per unit 50 30
Contribution margin per hour 50 60
Total contribution margin from selling only one 2,500,000 3,000,000
Less lease cost if ex4 - (600,000)
Net Relevant benefit 2,500,000 2,400,000

Even though EX4 has the higher contribution margin per unit of the constrained resource, the
fact that Gormley must incur additional costs of $600,000 to achieve this higher contribution
margin means that Gormley is better off using its entire 50,000-hour capacity on the regular
machine to produce and sell 50,000 units (50,000 hours / 1 hour per unit) of A6. The additional
contribution from selling EX4 rather than A6 is $500,000, which is not enough to cover the
additional costs of leasing the high-precision machine. Note that, because all other overhead
costs are fixed and cannot be changed, they are irrelevant for the decision. Gormley produces
50,000 units of A6, which increases operating income by $2,500,000.
2.
A6 ($) EX4 ($)

Contribution margin from selling only one 3,250,000 3,900,000
Less lease cost - (600,000)
Less cost of the increased quantity (300,000) (300,000)
Net relevant benefit 2,950,000 3,000,000

Investing in the additional capacity increases Gormley’s operating income by $500,000 for
EX4, so Gormley should add 15,000 hours to the regular machine. With the extra capacity
available to it, Gormley should use its entire capacity to produce EX4. Using all 65,000 hours
of capacity to produce EX4 rather than to produce A6 generates additional contribution
margin of $650,000, which is more than the additional cost of $600,000 to lease the high-
precision machine. Gormley should therefore produce and sell 130,000 units of EX4 (65,000
hours /0.5 hours per unit of EX4) and zero units of A6

3.
A6 ($) EX4 ($) V2 (S)

Selling Price 180 280 240
Less Variable Manufacturing Cost (110) (190) (130)
Variable marketing Cost (20) (60) (20)
Contribution Margin 50 30 90
Contribution Margin per constrained resource 50 60 90
The operating profit of V2 will be $(20,000 x 90) = $1,800,000.
45,000 hours available A6 ($) EX4 ($)

Total contribution margin from selling only one 2,250,000 2,700,00
Less Lease cost - (600,000)
2,250,000 2,100,000
The product mix should be 20,000 units of V2 and 45,000 unit of A6.
The contribution margin will be $ (2,250,000 + 1, 800,000) = $4,050,000
The operating income will increase by $1,050,000.
Gormley should accept the Clark Corporation business.

11-45
1. Contribution Margin for Masoline
=$ 235 – 3*30 - 15*3 = $100

Contribution Margin for Aldernite
= $ 305 – 3*45 – 15*4 = $110

If only Masoline is produced, 18,000 doors with a contribution margin of $1,800,000.
If only Aldernite is produced, 12,000 doors with a contribution margin of $1,320,000.
Masoline should be produced

2. Let the Aldernite be X
45X + 30X*3 = 540,000
45X + 90X = 540,000
135X = 540,000
X = 4,000
The company can produce 4,000 doors of Aldernite and 12,000 doors of Masoline.

The total contribution margin
= $ 4,000*110 + 12,000 *100
= $ 1,640,000

3. Let the Aldernite be X
45X + 30X*3 = 540,000 + 9,000
45X + 90X = 549,000
135X = 549,000
X = 4,066.67
The company can produce 4,066 doors of Aldernite and 12,198 doors of Masoline.
The company can extra produce 66 doors of Aldernite and 198 doors of Masoline.

The total contribution margin
= $ 4,066*110 + 12,198 *100
= $ 1,667,060
4. Even there is more labour hours, production will remain unchanged. As the limiting
constraints is pounds of material, instead of labour hours.

11-48

1.
Let D represent the batches of Della’s Delight made and sold. Let B represent the batches of
Bonny’s Bourbon made and sold. The contribution margin per batch of Della’s Delight is
$300. The contribution margin per batch of Bonny’s Bourbon is $250.

The LP formulation for the decision is: Maximize $300D + $250 B
Subject to 30D + 15B <= 660
15B <= 270
10D + 15B <= 300

2.
Subject to 30D + 15B <= 660 ------- (1)
15B <= 270 ----------(2)
10D + 15B <= 300 ---------(3)
B = 270/15 = 18
Sub b=18 into (3)
10(18) + 15B = 300
15B = 300 – 180
D = 8

The optimal number should be 18 batches of Della’s Delight and 8 batches of Bonny’s
Bourbon.

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11-43

A6 ($) EX4 ($)

A6 ($) EX4 ($) V2 (S)

45,000 hours available A6 ($) EX4 ($)

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