Reference no: EM13305404

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 $ 30 $ 64 $ 190
Maximum annual demand (units) 20,000 10,000 30,000
Input requirement per unit
Direct material 0.5 yards 0.3 yards 0.6 yards
Direct labor 0.7 hours 2 hours 7 hours

Costs
Variable costs
Materials $ 20 per yard
Direct labor $ 16 per hour
Factory overhead $ 4 per direct labor-hour
Marketing 10 % of sales price
Annual fixed costs
Manufacturing $ 36,000
Marketing $ 8,000
Administration $ 30,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 30,000 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?
Classic
Basic
Formal
c. Given the information in the problem so far, what product mix do you recommend?
Classic and Basic
Basic and Formal
Classic and Formal
d. How much operating profit should your recommended product mix generate? (If needed, round your units to produce number downward to the nearest whole number.)
e. Suppose that the company could expand its labor capacity by running an extra shift that could provide up to 10,000 more hours. The direct labor cost would increase from $16 to $19 per hour for all hours of direct labor worked during the extra shift. What additional product(s) should Austin manufacture and what additional profit would be expected with the use of the added shift? (Round your answer to 2 decimal places.)