PRODUCT MIX DECISION

Q.
Aramis Aromatics company produces & sells its product AA100 to well known cosmetics companies for $940 per ton. The marketing manager is considering the possibility of refining AA100 further into finer perfumes before selling them to the cosmetics companies. Product AA101 is expected to command a price of $1,500 per ton & AA102 a price of $1,700 per ton.The maximum demand for AA101 is 400 tons & for AA102 is 100 tons. The annual plant capacity of 2,400 hrs is fully utilized at present to manufacture 600 tons of AA100. The marketing manager proposed that Aramis sell 300 tons of AA100,100 tons of AA101 & 75 tons of AA102in the next year.It requires 4 hrs of capacity to make 1 ton of AA100, 2 hrs for refine of AA100 further into AA101, and 4 hrs to refine 1 ton of AA100 into AA102 instead.The plant accountant made this following sheet.

Cost Item
Dir. Material - Chemical & Fragrance Dir. Material - AA 100 Direct labor Variable manufacturing support (Variable) Fixed Total manufacturing cost Total selling support (Variable) Fixed Total Cost Proposed sales Level Max Demand

AA100
$560 60 60 120 $800 20 10 830 300 ton 600 ton

AA101
$400 800 30 30 60 $1,320 30 10 1,360 100 ton 400 ton

AA102
$470 800 60 60 120 $1,510 30 10 1,550 75 ton 100 ton

(a) Conribution margin for each product? (b) Determine the production lvl for three product under the present constraints on plant capacity that maximize total contribution? (c) Suppose a customer, Cosmos Cosmetics Company, is very interested in the new product AA101. It has offered to sign a long-term contract for 400 tons of AA101. It is also willing to pay a higher price if the plant capacity is dedicated to the production of AA101. What is the minimum price for AA101 at which it becomes worthwhile for Aramis to dedicate its entire capacity to the production of AA101?

(d) Suppose, instead, that the price of AA101 is $1,500 per ton and that the capacity can be increased temporarily by 600 hours if the plant is operated overtime. Overtime premium payments to workers and supervisors will increase direct labor and variable manufacturing support cost by 50% for all products. All other cost will remain unchanged. It is worthwhile operating the plant overtime? If the plant is operated overtime for 600 hours, what are the optimal production levels for the three products?

Presented By: Group IV

Udai Kr. Jayant Das : Mukul Mehra : Saurabh Tyagi : Sanjay Gupta : 033 Vipin Kr Singh : 047 Gaurav Bhargava : 012

(A.)

Unit cost
Dir. Material - Chemical & Fragrance Dir. Material - AA 100 Direct labor Variable manufacturing support Total variable manufacturing cost Total selling support Total variable cost Sales price Contribution margin per ton MH per ton Contribution margin per MH

AA100
$560 60 60 $680 20 $700 940 $240 4 hrs $60

AA101
$400 800 30 30 $1,260 30 $1,290 1,500 $210 6 hrs $35

AA102
$470 800 60 60 $1,390 30 $1,420 1,700 $280 8 hrs $35

(B.) AA100 has a higher contribution margin per MH than AA101 and A102.
Aramis Aromatics should produce AA100 up to 600 tons. Since the production of 600 tons of AA100 requires = 600x4= 2400MH Which is equals available capacity, no other products will be manufactured. Therefore, the optimal production levels are: AA100 = 600 tons AA101 = 0 tons AA102 = 0 tons

(C.) Opportunity cost is $60 per MH (the contribution margin per MH for AA100 production
that must be sacrificed) and each ton of AA101 requires 6 MH. Required contribution margin per ton = $60x6 = $360 Variable cost per ton = 1,290 Required minimum sales per ton =$1,650

(D.) It is worthwhile operating the plant overtime.

The optimal production level is AA100 = 600 tons AA101 = 100 tons AA102 = 0 tons Because regular capacity of plant is 2,400 MH (before overtime) to produce 600 tons of AA100.In this case demand for AA100 has been filled fully now we are concentrating on AA101 & AA102. Under overtime: Dir. Material - Chemical & Fragrance Dir. Material - AA 100 Direct labor Variable manufacturing support Total variable manufacturing cost Total selling support Total variable cost Sales price Contribution margin per ton MH per ton Contribution margin per MH AA100 $560 90 90 $740 20 $760 940 $180 4 $45 AA101 $400 800 45 45 $1,290 30 $1,320 1,500 $180 6 $30 AA102 $470 800 90 90 $1,450 30 $1,480 1,700 $220 8 $27.5

Since, contribution margin per MH for AA101 & AA102 is positive, So it is worthwhile to opertate the plant overtime.