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Savino Company has assembled the following data pertaining to its two products.
Thermometer
Barometer
Direct material cost per unit
$11
$6
Direct labor cost per unit
$ 9
$ 4
Manufacturing overhead cost applied @ $16 per machine hour (per unit of product)
$32
$16
Annual demand (in units)
28,000
20,000
Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $10. The selling price of thermometer and barometer is $60 and $35 respectively. (2 + 5 + 7 + 6 = 20 points)
Rank these two products according to profitability using Contribution margin per unit as the profitability metric and Contribution Margin Ratio as the profitability metric.
If 50,000 machine hours are available for Savino for the manufacture of thermometers and barometers, and Savino wants to follow an optimal strategy to maximize profits, how many units of each product should the firm manufacture? How many units of each product would Savino leave behind in the market for the competitors to pickup because of the constraint on machine capacity? How much profit would the company make under this production plan?
Suppose Savino has a policy of meeting the entire market demand by outsourcing even if it is unable to produce enough units in house. Also, assume that Savino can purchase thermometers and barometers from a trusted supplier at a price of $50 and $23 per unit respectively. Savino has a policy of first utilizing 100% of capacity in house before it considers outsourcing options. Under these circumstances, recommend a profit maximizing optimal production plan (i.e. how many units of thermometers and barometers will be produced in house?). Also, how many units of thermometers and barometers will be outsourced? What is the amount of profit that would be generated now?
With all other things constant, if Savino is able to reduce the direct material cost for a barometer from $6 to $3 per unit, how will your answer change for…