Reference no: EM132577680

Brighten Ltd manufactures three final products and one component separately in a single facility. Below is the relevant information about the final products:

                                                          Product A                        Product B                        Product C

Direct materials                             $10.90                             $15.80                 $8.00

Direct labour                                 12.50                              12.60                    9.90

Variable manufacturing overhead             2.40                           1.20                      1.40

Fixed manufacturing overhead            11.60                         7.20                          7.80

Unit product cost                             $37.40                        $36.80                    $27.10

Selling price per unit                         $55.80                        $54.60                      $43.10

Variable selling cost per unit                 $2.10                          $1.40                     $1.90

Machine mixing minutes per unit              2 min.                          1 min.                 0.5 min.

Monthly demand in units                          2,000                           1,000                 3,000

The mixing machines are the potential constraint in the production facility. The machines have a total capacity of 5,900 minutes available per month.

The production of the above three products requires a component called SAR. The estimated requirement is 4,000 units per year. The unit production costs of SAR are as follows:

Direct materials                              $35

Direct labour                                   10

Variable manufacturing overhead          8

Fixed manufacturing overhead          20

Unit product cost                           $73

An outside supplier has offered to sell all the 4,000 units of SAR required by Brighten Ltd. If the management decides to discontinue making SAR, 40% of the above fixed manufacturing overhead costs could be avoided.

Required:

Question (a) Based on limited machine mixing minutes available per month, determine the optimal production mix of the three products that will maximise operating profits. Show all calculations.

Question (b) Assume that there is no other alternative use for the facilities presently devoted to production of SAR. If the outside supplier offers to sell the SAR for $65 each, should the company accept the offer? Fully support your answer with appropriate calculations.