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Product mix decision Aramis Aromatics Company produces and 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 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 2,400 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:
Required
(a) Determine the contribution margin for 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 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 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 operated 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 threeproducts?
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