Riteway currently produces and sells five different products. Total demand for the products exceeds the firm’s capacity to produce all of them. The constraint on production is the time available on a special machine. Data on the products and time required on the special machine are summarized in the following chart:
The firm has only 5,500 hours of time available on the special machine per period. Fixed costs are $110,000 per period.
REQUIRED
A. How many units of each product should the firm produce and sell to maximize income?
B. On further analysis, it is determined that while fixed costs do not vary as production volumes change, they do vary based on the number of different product lines. If only two types of products are produced, these costs are $60,000, but if all five types of products are produced, these costs will be $135,000. Using the two-point method, determine a linear cost function for the cost of product lines.
C. Describe possible business reasons for the cost behaviour described in Part B.
D. Using the results from Part A and the cost function you developed for Part B, prepare an income statement for the firm by product line and by total products.
E. Review the results in Part D. Prepare a new product line income statement that reflects any changes that should be made in the production plans to maximize income.
F. Identify reasons why the managers cannot be certain that they have accurately estimated the following for each product: selling price, variable costs, machine hours needed per unit, and maximum unit demand per period.
G. Discuss how the business risks in Part F might affect the managers’ production decisions.
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