Chef Gourmet, Inc., has assembled the following data pertaining to its two most popular products.


Blender Food Processor
Direct material $ 21 $ 30
Direct labor 14 42
Manufacturing overhead @ $52 per machine hour 52 104
Cost if purchased from an outside supplier 71 140
Annual demand (units) 37,000 46,000



Past experience has shown that the fixed manufacturing overhead component included in the cost per machine hour averages $26. Management has a policy of filling all sales orders, even if it means purchasing units from outside suppliers.


Required:
1.

If 78,000 machine hours are available, and management desires to follow an optimal strategy, how many units of each product should the firm manufacture? How many units of each product should be purchased?






2.

With all other things constant, if management is able to reduce the direct material for a food processor to $21 per unit, how many units of each product should be manufactured? Purchased?

To answer these questions, we need to calculate the cost of manufacturing each product and compare it to the cost of purchasing from an outside supplier.

1. Calculation for optimal strategy given machine hours:
a. Calculate the total manufacturing cost per unit for each product:
- Blender: Direct material + Direct labor + Manufacturing overhead = $21 + $14 + $26 = $61
- Food Processor: Direct material + Direct labor + Manufacturing overhead = $30 + $42 + $26 = $98
b. Calculate the cost of purchasing each product from an outside supplier:
- Blender: $71
- Food Processor: $140
c. Calculate the total manufacturing cost for each product considering annual demand:
- Blender: Total manufacturing cost per unit x Annual demand = $61 x 37,000 = $2,257,000
- Food Processor: Total manufacturing cost per unit x Annual demand = $98 x 46,000 = $4,508,000
d. Calculate the total machine hours required to manufacture the products:
- Blender: Machine hours per unit x Annual demand = 1 x 37,000 = 37,000 machine hours
- Food Processor: Machine hours per unit x Annual demand = 2 x 46,000 = 92,000 machine hours
e. Calculate the number of units to be manufactured and purchased:
- Blender: Manufacture 37,000 units, Purchase 0 units
- Food Processor: Manufacture 78,000 - 37,000 = 41,000 units, Purchase 46,000 - 41,000 = 5,000 units

2. Calculation for reduced direct material cost:
a. Calculate the new total manufacturing cost per unit for the food processor:
- Food Processor: Direct material + Direct labor + Manufacturing overhead = $21 + $42 + $26 = $89
b. Calculate the new total manufacturing cost for the food processor considering annual demand:
- Food Processor: Total manufacturing cost per unit x Annual demand = $89 x 46,000 = $4,094,000
c. Calculate the number of units to be manufactured and purchased:
- Blender: Manufacture 37,000 units, Purchase 0 units
- Food Processor: Manufacture 78,000 - 37,000 = 41,000 units, Purchase 46,000 - 41,000 = 5,000 units

In summary:
1. If 78,000 machine hours are available, the firm should manufacture 37,000 units of the Blender and manufacture 41,000 units of the Food Processor. The firm should not purchase any units of either product.
2. If the direct material cost for the food processor is reduced to $21 per unit, the firm should manufacture 37,000 units of the Blender and manufacture 41,000 units of the Food Processor. The firm should not purchase any units of either product.