Basic working calculations based on the exhibit B and C:

Direct Material Costs

Model 101 Model 102

$
$
24,000.00
20,000.00

Direct Labour Costs

$
1,200.00
$
800.00
$
2,000.00
$
4,000.00

$
2,400.00
$
600.00
$
1,500.00
$
4,500.00

Total Variable Overhead

$
2,100.00
$
2,400.00
$
3,500.00
$
8,000.00

$
4,000.00
$
2,000.00
$
2,500.00
$
8,500.00

Total of Variable costs

$
36,000.00

$
33,000.00

Selling Price

$
39,000.00

$
38,000.00

Contribution per Unit

$
3,000.00

$
5,000.00

Engine Assembly
Metal Stamping
Final Assembly
Total
Variable Overhead
Engine Assembly
Metal Stamping
Final Assembly

Fixed Costs
Engine Assembly
Metal Stamping
Model 101 Assembly
Model 102 Assembly
Total Fixed Costs

$
1,700,000.00
$
2,700,000.00
$
2,700,000.00
$
1,500,000.00
$

8,600,000.00
Defining Constraints based on Exhibit A:
1*(M101) + 2*(M102) <= 4,000
2*(M101) + 2*(M102) <= 6,000
2*(M101) <= 5,000
3*(M102) <= 4,500
Maximum (M101) = 2,500
Maximum (M102) = 1,500
Contribution per unit M101 = $ 3,000
Contribution per unit M102 = $ 5,000

1.
(a) To find the best product mix we have to maximize:
(M101* Contribution per unit M101) + (M102* Contribution per unit M102)
Fixed Overheads
At M101 = 2,000 and M102 = 1,000
Profit = (2000*3000) + (1000*5000) 8600000 = $ 2,400,000
Since this is the maximum possible value, the best product mix is
M101 = 2,000 and M102 = 1,000
(b) Since the engine capacity has been increased by one unit, the new
constraint equation for Engine Assembly is:
1*(M101) + 2*(M102) <= 4,001
Calculating the best product mix in this case,
(M101* Contribution per unit M101) + (M102* Contribution per unit M102)
Fixed Overheads
At M101 = 1,999 and M102 = 1,001
Profit = $ 2,402,000
Hence, the extra unit of capacity is worth $ 2,000.

(c) The new engine capacity is 4,100 machine-hours.

1*(M101) + 2*(M102) <= 4,100
At M101 = 1,900 and M102 = 1,100
Profit = $ 2,600,000
Increase in capacity = $ 2,600,000 - $ 2,400,000 = $ 200,000
Therefore, the net increase in profit is 100 times.
2.
As seen in the part (d) above, the maximum possible increase in capacity is
500 machine-hour and corresponding profit increase is $ 2,000 per hour.
Therefore,
At M101 = 1,500 and M102 = 1,500
Profit = 3,400,000
3.
The new constraints in this case would be defined as:
1*(M101) + 2*(M102) + 0.8*(M103) <= 4,000
2*(M101) + 2*(M102) + 1.5*(M103) <= 6,000
2*(M101) <= 5,000
3*(M102) <= 4,500
Profit = (M101* Contribution per unit M101) + (M102* Contribution per unit
M102) + (M103* Contribution per unit M103) Fixed Overheads
It is provided that Contribution per unit M103 = $ 2,000
Since the Contribution for M103 is less than

4.
Optimal product mix:-

M101
2000

M102
1000

OBJECTIVE FUNCTION
2400000

Constraints
Departments

M101 (machine
hours)

M102 (machine
hours)

Engine
assembly
Metal stamping
M101 assembly
M102 assembly

Total machine
hours available
per month
4000

2
2
0

2
0
3

6000
5000
4500

Now in original optimum product mix is 2000 for M101 and with M101
assembly, we can produce 5000/2=2500 for M101 trucks. So our M101 still
has capacity for 500 more units. With same analysis, for M102 assembly can
produce 4500/3= 1500 units and our optimal product mix is 1000 units for
M102. So we have 500 units more to produce in overtime by engine
assembly line.
By analysis, we can add only 500 more units of engine assembly in overtime.
So with total engine assembly constraint with 4500 units, we have 1500*1 +
1500*2 =4500.
New variables with 500 unitsM101
1500

M102
1500

OBJECTIVE FUNCTION
3400000

Objective function is achieved by (3000* M101 Units + 5000 M102 =4500)fixed overhead cost which was 8600000. With new fixed cost of 750000 and
new contribution margin with new direct labour , you can get net
contribution margin .
So new cost analysis:New Direct labour
cost
New fixed cost
Saving in labour cost
Contribution new
Net contribution

250*3600$

500*1200

900000
750000
600000
3400000
2350000

So additional revenue= (50000) $

So there is no need to assemble engine overtime because it will cause loss of
50000$
5.
For new product mix:M101 should be at least three times of M102 model.
M101
2250

M102
750

OBJECTIVE FUNCTION
1900000

Objective function is achieved by (3000* M101 Units + 5000 M102 *4000)fixed overhead cost which was 8600000. So putting values of M101= 2250
and M102= 750) , we get objective function 1900000. So we can calculate
new additional contribution.
So new additional contribution due to this decision is 2400000-1900000=
500000$
So we get additional contribution of 500000$ so we are in profit.
This should be our optimal product mix.