Kitchen Magician, Inc. has assembled the following data pertaining to its two most popular products.
Blender Electric Mixer
Direct Material $6.00 $11.00
Direct Labor $4.00 $9.00
Manufacturing overhead @ 16 per machine hour $16.00 $32.00
Cost if purchasing from an outside supplier $20.00 $38.00
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 $10. Kitchen Magician’s management has a policy of filling all sales orders, even if it means purchasing from outside suppliers.
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 an electric mixer to $6 per unit, how many units of each product should be manufactured? Purchased?