Reference no: EM1337666

Explain Product Mix Decisions

This is a homework problem I have about Product Mix Decision.

There is a company that produces and sells a product, AA100 and wants to branch out and refine AA100 make AA101 and AA102. The information is as follows:

AA100 sells for $940 per ton
AA101 sells for $1,500 per ton max demand is 400 tons
AA102 sells for $1,700 per ton max demand is 100 tons
The annual plant capacity of 2,400 hrs is used at present to manufacture 600 tons of AA100. The marketing director proposed a plan to sell:
300 tons of AA100
100 tons of AA101
75 tons of AA102
It requires 4 hours of capacity to make 1 ton AA100
It requires 2 hours of capacity to make 1 ton AA101
It requires 4 hours of capacity to make 1 ton of AA102
The cost sheet for the three products is:

Cost Item AA100 AA101 AA102
Direct Materials:
Chemicals $560 $400 $470
AA100 0 800 800
Direct labor 60 30 60
Manufacturing Support:
Flexible 60 30 60

Capcity-related 120 60 120

Total manufacturing Costs $800 $1320 $1510

Selling support:
Flexible 20 30 30
Capacity-related 10 10 10

Total cost $830 $1360 $1550

Proposed Sales levels 300 tons 100 tons 75 tons
Maximum Demand 600 tons 400 tons 100 tons

The questions that I am having trouble with are:

1. what are the production levels for the three products under the present constraint on plant capacity that will maximize total contribution

2. Suppose a customer is very interested in the new product AA101. It wants to sign a contract for 400 tons of AA101. It is also willing to pay a higher price if the entire plant capacity is dedicated to the production of AA101. What is the minimum price for AA101 at which it becomes worthwhile for the company to dedicate its entire capacity to the production of AA101?