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Austin Enterprises makes and sells three types of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow: |
| Basic | Classic | Formal | |||||||
| Sales price | $ | 32 | $ | 66 | $ | 180 | |||
| Maximum annual demand (units) | 20,200 | 10,200 | 29,900 | ||||||
| Input requirement per unit | |||||||||
| Direct material | 0.70 yards | 0.10 yards | 0.70 yards | ||||||
| Direct labor | 0.80 hours | 1.80 hours | 7.50 hours | ||||||
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| Costs | |||
| Variable costs | |||
| Materials | $ | 18 | per yard |
| Direct labor | $ | 14 | per hour |
| Factory overhead | $ | 2 | per direct labor hour |
| Marketing | 10 | % of sales price | |
| Annual fixed costs | |||
| Manufacturing | $ | 36,200 | |
| Marketing | $ | 8,020 | |
| Administration | $ | 30,200 | |
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The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 30,200 direct labor hours per year caused by the plant layout. |
| Required: |
| a. | How much operating profit could the company earn if it were able to satisfy the annual demand? |
| b. |
Which of the three product lines makes the most profitable use of the constrained resource, direct labor? |
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| c. | Given the information in the problem so far, what product mix do you recommend? | ||||||
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| d. |
How much operating profit should your recommended product mix generate?
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