Williams Gear makes and sells three types of computer laptop sleeves: leather, fabric, and plastic. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow: Leather Fabric Plastic Sales price $ 160 $ 70 $ 40 Maximum quarterly demand (sleeves) 2,500 12,500 20,000 Input requirements per unit Direct material quantity per sleeve (ounces) 16 6 10 Direct material price per ounce of material $ 4.25 $ 6.00 $ 2.20 Direct labor quantity per sleeve (hours) 0.9 0.4 0.3 Direct labor price per hour $ 35 $ 35 $ 35 Other Costs Variable costs Factory overhead $ 5 per direct labor-hour Marketing $ 6% of sales price Quarterly fixed costs Manufacturing $ 70,000 Marketing $ 15,000 Administration $ 60,000 Williams has two production limits: (1) the demand for the individual sleeves (see maximum quarterly demand) and (2) 10,000 direct labor-hours per quarter caused by the physical layout of the production area. Required: a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of sleeve using the table below. a-2. How much operating profit could Williams earn if it were able to satisfy the annual demand? b-1. Compute the contribution margin for each sleeve per the constrained resource, direct labor. b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor? c. Given the information so far, what product mix do you recommend? d-1. Calculate the contribution margin for each type of sleeve using the product mix recommended in requirement c. d-2. How much operating profit should your recommended product mix generate? e. Suppose that the company could expand its labor capacity by leasing a new stitching machine that will free up 2,160 direct labor hours per quarter. What is the maximum quarterly lease payment that Williams Gear would be willing to pay? f. Suppose the company selling the stitching machine is not quite sure without further analysis how many direct labor hours the new machine would free up. Regardless of the number of new hours, what is the maximum quarterly lease payment Williams Gear would be willing to pay?
Williams Gear makes and sells three types of computer laptop sleeves: leather, fabric, and plastic. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow:
| Leather | Fabric | Plastic | |
|---|---|---|---|
| Sales price | $ 160 | $ 70 | $ 40 |
| Maximum quarterly demand (sleeves) | 2,500 | 12,500 | 20,000 |
| Input requirements per unit | |||
| Direct material quantity per sleeve (ounces) | 16 | 6 | 10 |
| Direct material price per ounce of material | $ 4.25 | $ 6.00 | $ 2.20 |
| Direct labor quantity per sleeve (hours) | 0.9 | 0.4 | 0.3 |
| Direct labor price per hour | $ 35 | $ 35 | $ 35 |
| Other Costs | ||
|---|---|---|
| Variable costs | ||
| Factory |
$ 5 | per direct labor-hour |
| Marketing | $ 6% | of sales price |
| Quarterly fixed costs | ||
| Manufacturing | $ 70,000 | |
| Marketing | $ 15,000 | |
| Administration | $ 60,000 |
Williams has two production limits: (1) the demand for the individual sleeves (see maximum quarterly demand) and (2) 10,000 direct labor-hours per quarter caused by the physical layout of the production area.
Required:
a-1. Assuming the company can satisfy the annual demand, calculate the contribution margin for each type of sleeve using the table below.
a-2. How much operating profit could Williams earn if it were able to satisfy the annual demand?
b-1. Compute the contribution margin for each sleeve per the constrained resource, direct labor.
b-2. Which of the three product lines makes the most profitable use of the constrained resource, direct labor?
c. Given the information so far, what product mix do you recommend?
d-1. Calculate the contribution margin for each type of sleeve using the product mix recommended in requirement c.
d-2. How much operating profit should your recommended product mix generate?
e. Suppose that the company could expand its labor capacity by leasing a new stitching machine that will free up 2,160 direct labor hours per quarter. What is the maximum quarterly lease payment that Williams Gear would be willing to pay?
f. Suppose the company selling the stitching machine is not quite sure without further analysis how many direct labor hours the new machine would free up. Regardless of the number of new hours, what is the maximum quarterly lease payment Williams Gear would be willing to pay?
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