Machine hours required
per truck
Total machine
Department M101 M102 hours available
per month
Engine
1 2 4000
Assembly
Metal Stamping 2 2 6000
M101 Assembly 2 0 5000
M102 Assembly 0 3 4500
Standard product cost
M101 M102
Direct materials $24000 $20000
Direct labor
Engine
1200 2400
assembly
Metal stamping 800 600
Final assembly 2000 1500
4000 4500
Variable overhead
8000 8500
per unit
Selling price per
$39000 $38000
unit
1. (a) Find the best product mix.
(b) What would be the best product mix if engine assembly capacity were raised by
one unit, from 4000 to 4001 machine hours? What is the extra unit of capacity
worth?
(c) Assume that a second unit of engine assembly capacity worth the same as the
first. Verify that if capacity were increased to 4100 machine hours, then increase in
contribution would be 100 times that in part (b).
(d) How many units of engine assembly capacity can be added before there is a
change in the value of an additional unit of capacity?
2. What is the maximum rent it should be willing to pay for a machine hour of engine
assembly capacity, if any purchased from outside supplier? What is the maximum number of
machine hours it should rent?
3. Company is considering the introduction of a new truck M103. Each M103 would give a
contribution of $2000. The total engine assembly capacity would be sufficient to produce
5000 M103s per month, and the total metal stamping capacity would be sufficient to
produce 4000 M103s per month. The new truck would be assembled in the M101 assembly
department, each M103 requiring only half as much time as a M101.
(a) Should company produce M103?
(b) How high would be the contribution on each M103 have to be before it became
worthwhile to produce the new model?
4. Engine can be assembled on overtime in the engine assembly department. Suppose
production efficiencies do not change and 2000 machine hours of engine assembly overtime
capacity are available. Direct labor costs are higher by 50% for overtime production. While
variable overhead would remain the same, monthly fixed overhead in the engine assembly
department would increase by $0.75 million. Should company assembly engines on
overtime?
5. It was agreed to maximize the monthly contribution as long as number of M101 produced
was at least three times the number of M102s. What is the resulting product mix?
