Product mix decision

Aramis Aromatics Comapny produces and sells its product AA100 to well-known cosmetics companies for $940 per ton. The marketing manager is considering the possibility or refining AA100 further into finer perfumes before selling them to the cosmetic companies. Product AA101 is expected to command a price of $1,500 per ton and AA102 a price of $1,700 per ton. The maximum expected demand is 400 tons for AA101 and 100 tons for AA102.

The annual plant capacity of 2,499 hours 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, and 75 tons of AA102 in the next year. It requires 4 hours of capacity to make 1 ton of AA100, 2 hours to refine 1 ton of AA100 further into AA101, and 4 hours to refine 1 ton of AA100 into AA102 instead. The plant accountant has prepared the following information for the three products:

Costs per TonCost Item AA100 AA101 AA102Direct Materials: Chemicals and fragrance

$560 $400 $470

AA100 0 800 800Direct Laabor 60 30 60Manufacturing overhead. Variabel FixedTotal Manufacturing costs

60120$800

3060$1,320

60120$1.510

Selling cost: Variabel FixedTotal Costs

2010$830

3010$1,360

3010$1,550

Proposed sales level 300 tons 100 tons 75 tonsMaximum demand 600 tons 400 tons 100 tons

Required

(a) Determine the contribution margin each product.(b) Determine the production levels for the three products under the present constraint on plant

capacity that will maximize total contribution.(c) Suppose a customer, Cosmos Cosmetic Company, is very interest 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 entire plant capacity is dedicated to the production of AA101. What is the price for AA101 at which Aramis is indifferent between its current production of AA100 and dedicating its entire capacity to the production of AA101 for Cosmos?

(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 opereted overtime. Overtime premium payments to workers and supervisors will increase direct labor and variable manufacturing overhead costs by 50% for all products. All other costs will remain unchanged. Is it worthwhile operating the plant overtime? If the plant is operated overtime for 600 hours, what are the optimal production levels for the three products.