Semester 2, 2019

ENGINEERING MANAGEMENT 3000/5039

TUTORIAL 2 - SOLUTIONS

A1// Total
= Direct Direct
Manufacturing + + Direct
Labour material Manufacturing
Cost for 500 units Overhead
=5 hrs/unit × $22 × 500 + $40 per unit × 500 + 0.4 × (5 × 22 × 500) = $97,000

Allowing 25% profit gives $97,000 × 0.25 = $24,250

Giving a total revenue value required by selling the additional 500 units of:

$24,250 + $97,000 = $121,250 for the additional 500 units

The Unit price for 500 items is $121,250/500 = $242.5 per unit

A2// (a) CM = Revenue – Variable costs

Contribution margin = $10,000 – ($4,000 + 1,000)
= $5,000

(b) Since we have a total of 2500 widgets the Unit CM is given by:
Unit Contribution Margin = (Total CM) / (Number of widgets)

= $5000/$2500 = $2/ unit (Each widget we sell we make $2)

(c)
Profits = Revenue - Total Cost
Profits = Revenue – [Fixed Costs + Variable Cost ]
Thus
Net operating profit = $4 x 2500 – ($2,000 + $500) – ($4000 + $1000)
Net operating profit = $2,500

ENGINEERING MANAGEMENT 3000/5039 -1- Solutions Tutorial 2

A3// Contribution margin per unit
= sales price – variable cost per unit
= $800 – $500 = $300 per unit

Total contribution margin

= total sales – total variable costs
= units sold * sales price – units sold * variable cost per unit)
= units sold * (sales price – variable cost per unit)
= $800 * 200,000 - $500 * 200,000
= 200,000 ($800 - $500)
= $60,000,000

Note: Total contribution margin can also be calculated as follows:

Total contribution margin (method 2):

= contribution margin per unit * unit sales
= $300 * 200,000 = $60,000,000

Breakeven point in units

= fixed costs/contribution margin per unit
= $2,400,000/$300 = 8000 units

Breakeven point in dollars

= breakeven point in units * sales price
= 8000 * $800 = $6,400,000

A4// Cost of raw material = $10,000 / 100,000 = $0.1 = 10 cents/unit

Cost of labour = (2,500hr x $20/hr) / 100,000 = $0.5 = 50 cents/unit

VC /unit = 10 cents + 50 cents = 60 cents per unit

Total Variable Cost is:

TVC = [Total QTY of output ] x VC /unit
TVC = [5000 ] x 60 cents
TVC = $3000 (Note: this is the total cost of producing 5000 units)

Profit = Revenue – Total Costs (Note no fixed costs are given so fixed cost = $0)

Profit = Revenue – [Total Fixed Costs + Total Variable Costs]

Note in this case Total fixed cost is $0

Profit = $5000 - $3000

Profit = $2000 (profit for selling 5000 units)

ENGINEERING MANAGEMENT 3000/5039 -2- Solutions Tutorial 2

A5//

Completed and transferred out (800 units) $1,280,000

Since material costs for 1000 units is $1,000,000 gives $1000/unit for materials and
conversion costs for 1000 units is $600,000 gives $600/unit to convert
Thus for materials and conversion = ($1000 + $600) = $1,600 to complete.
We have so far 800 units that are completed, this gives 800 x $1600 = $ 1,280,000

Assignment of costs

Completed and transferred out (800 units) $1,280,000

Work in progress 1:
Direct material cost (for 100 units) $100,000
(100 x $1000)
Conversion cost (50% units) $30,000
(100 x 600 x 50%)
Total work in progress 1 $130,000

Work in progress 2:
Direct material cost (100 units) $100,000
(100 x $1000)
Conversion cost (50 units 25% completed) $7,500
(50 x 600 x 25%)

Total work in progress 2 $107,500

$1,517,500
Total cost accounted for

Total cost (based on completed units)= $1,517,500/ 800 = $1896.88 per unit

Note that conversion for 50 units has not yet started.

NOTE: When we say that "100 units are in production and conversions are completed by 50%",
means that only 50% of the 100 units have been converted and completed.

Only 800 units are totally complete, on the shelf and ready for sale. The other units are considered
still incomplete as they are still in the production phase and are not yet ready for sale and have not
yet been packaged.

ENGINEERING MANAGEMENT 3000/5039 -3- Solutions Tutorial 2

A6// B=0.75A

For every 4 items of A sold 3 items of B sold.

Or, if A=n then B=0.75n or put another way B = (¾) x A

a) At the breakeven point:
Total revenue = Total cost
Total Revenue product A + Total Revenue product B = Total cost of A + Total cost of B

TRA +TRB =FCA +VCA + FCB + VCB

Solving for product A

20A + 24 B = 1,400 +10A + 2,500 +20 B
Substitute for B = (¾) x A Gives

20A + 24 (0.75A) = 1,400 +10A + 2,500 +20 (0.75A)

38A = 3,900 + 25A

Gives A = 300 units B = 225 units

b) New product mix A = B

20A + 24A = 1,400 +10A + 2,500 +20A
A=278.9 units, rounding up gives: A = 279 units & B = 279

c) For a better profit, choose the product mix which contains more of the product that has
a higher contribution margin.

Selling price - Variable cost per unit A = 20 -10 = $10 per unit
CMA =
per unit A

Selling price - Variable cost per unit B = 24 - 20 = $4 per unit

CMB =
per unit B
Clearly, since product A has the greater contribution margin, product mix 4A to 3B should
be selected since it has the greater quantity of product A in the mix.

d) Constraint is machine time of 4,000 hours for both products.

CMA per = $10

machine hour 0.5 hrs per unit A = $20 per hour

CMB per $4
= 0.25 hrs per unit B = $16 per hour
machine hour

Product A is more profitable per hour of machine time, thus A should be produced more
than B. Choose product mix of 4A to 3B.

e) Total contribution margin of A is ($20 × 4,000 = $80,000) as opposed to $64,000

($16 × 4,000 = $64,000) for B. Company forgoes a profit of $16,000. Company
produces B although not profitable as A for competitive reasons, market position, etc.

ENGINEERING MANAGEMENT 3000/5039 -4- Solutions Tutorial 2

A // 7

B=0.75A
For every 4 items of A sold 3 items of B sold. i.e. B=0.75A
also
For every 3 items of A sold 5 items of C sold. i.e. A=0.6C

a) At breakeven point:

Total revenue = Total cost = Total Fixed Cost + Total Variable Cost

TRA +TRB +TRC =FCA +VCA + FCB + VCB+ FCC + VCC

20A + 26B + 30C = 1,400 +10A + 2,000 +18B + 2480 + 27C

Solving for product A

20A + 26 (0.75A) + 30 (A/0.6) = 1,400 +10A + 2,500 +18 (0.75A) + 2480 + 27(A/0.6)
20A + 19.5A + 50A = 5880 + 10A + 13.5A + 45A
21A = 5880
Gives A = 280 units, B = 210 units and C= 466.67 rounding up, C= 467 units

b) New product mix A = B = C or A:B:C 1:1:1

20A + 26B + 30C = 1,400 +10A + 2,000 +18B + 2480 + 27C
Since A = B = C
20A + 26A + 30A = 1,400 +10A + 2,000 +18A + 2480 +27A
76A = 5880 + 55A
Solving A= 280 units = B = C

c) Contribution margin = Selling Price (i.e. revenue) – Variable costs

Product A: CMA = TRA – VCA = 20 – 10 = $10 per unit
Product B: CMB = TRB – VCB = 26 – 18 = $ 8 per unit
Product C: CMC = TRC – VCC = 30 – 27 = $ 3 per unit

d) Determine which would be the more profitable product mix from the list
below:
Product mix1 A:B:C = 10:9:9 Profit = 10*10 + 9*8 + 9*3 = $199 profit / mix1
Product mix2 A:B:C = 9:10:9 Profit = 9*10 + 10*8 + 9*3 = $197 profit / mix2
Product mix3 A:B:C = 9:9:10 Profit = 9*10 + 9*8 + 10*3 = $192 profit / mix3
Product mix4 A:B:C = 9:9:9 Profit = 9*10 + 9*8 + 9*3 = $189 profit / mix4

As product A has the highest CM, Mix 1 is the most profitable since it has the greater
quantity of product A in the mix.

ENGINEERING MANAGEMENT 3000/5039 -5- Solutions Tutorial 2

A8// Case for 1000 units of Production
a. Total Direct Direct
manufacturing = + + Direct
Labour material manufacturing
cost overhead
= $60k + $30k +18k + 66k = $174k

b. Manufacturing costs per unit = $174,000/1000 = $174 / unit

c. Total variable VC VC selling,

= VC VC + +
cost = labour ++ material overhead admin

= $60k + $30k +18k + $10k = $118k

d. Variable costs per unit = $118,000/1000 = $118 / unit

e. Contribution Margin/unit = Revenue /unit - Variable Cost /unit

CM/unit = $600 - $118 = $482 / unit (for batch of 1000 units)

f. QBE = Total Fixed Cost / Contribution margin per unit

QBE = ($66k + $32k )/$482
QBE = 203.3 units
Rounding up gives 204 units to break even (for the 1000 unit production level)

g. In dollar terms = QBE x Revenue /unit

= 204 x $600
= $122,400

Case for 2000 units of Production

a. Total Direct Direct
manufacturing = + + Direct
Labour material manufacturing
cost overhead
= $60k + $60k +36k + 66k = $222k

b. Manufacturing costs per unit = $222,000/2000 = $111/ unit

c. Total variable VC VC selling,

= VC VC + +
cost = labour ++ material overhead admin

= $60k + $60k +36k + $20k = $176k

d. Variable costs per unit = $176,000/2000 = $88 / unit

e. Contribution Margin/unit = Revenue /unit - Variable Cost /unit

CM/unit = $600 - $88 = $512 / unit (for batch of 2000 units)

f. QBE = Total Fixed Cost / Contribution margin per unit

QBE = ($66k + $32k)/$512
QBE = 191.4 units
Rounding up gives 192 units to break even (for the 2000 unit production level)

g. In dollar terms = QBE x Revenue /unit

= 192 x $600
= $115,200

ENGINEERING MANAGEMENT 3000/5039 -6- Solutions Tutorial 2

A // 8 Continued ....

Even though it costs the company less on a per unit basis to manufacture a batch of 2000 units
compared to 1000 units (i.e. $174/unit1000 compared to $111/unit2000 ) and the per unit
contribution margin is greater for the batch of 2000 (CM2000= $512 /unit ) compared to the
batch of 1000, (CM1000= $482 /unit), the company may be reluctant to make a batch of 2000
units.

Why?, because it may require some form of upgrade or expansion to the existing plant to
accommodate the increased volume of product. If this is the case and it is a one off request it
might not be worth the company doing this as they will not recover the additional cost for the
upgrades required. However if this is possibly one of may orders of this size or greater, then
long term the upgrade costs can be recovered. This is a management decision.

However, in this example the company should proceed with the manufacture of the 2000 unit
batch. We can see the economy of scale in action in this example, since the fixed
potion of the costs remained constant for both orders of 1000 and 2000 units.
Meaning the management didn't have to spend more money upgrading existing plant to
accommodate the order.

ENGINEERING MANAGEMENT 3000 -7- Solutions Tutorial 2