Sullivan

Precision Tools makes cutting tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high-precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high-precision machine. The following information is available:

	A6	EX4
Selling price	$115	$185
Variable manufacturing cost per unit	$40	$120
Variable marketing cost per unit	$12	$17
Budgeted total fixed overhead costs	$250,000	$465,000
Hours required to produce one unit on the regular machine	1.0	0.5

Additional information includes the following:

a.

Sullivan

faces a capacity constraint on the regular machine of 50,000 hours per year.

b. The capacity of the high-precision machine is not a constraint.

c. Of the

$465,000

budgeted fixed overhead costs of EX4,

$225,000

are lease payments for the high-precision machine. This cost is charged entirely to EX4 because

Sullivan

uses the machine exclusively to produce EX4. The company can cancel the lease agreement for the high-precision machine at any time without penalties.

d. All other overhead costs are fixed and cannot be changed.

Sullivan

Precision Tools makes cutting tools for metalworking operations. It makes two types of tools: A6, a regular cutting tool, and EX4, a high-precision cutting tool. A6 is manufactured on a regular machine, but EX4 must be manufactured on both the regular machine and a high-precision machine. The following information is available:

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(Click to view the information.)Read the requirements

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.

Requirement 1. What product

mixthat

is, how many units of A6 and

EX4will

maximize

Sullivan's

operating income? Show your calculations. (Enter an amount in each input cell including zero balances.)

Begin by calculating the benefit from only selling A6 or EX4.

		A6	EX4
Contribution margin per unit		$63	$48 Wrong
	Hours of constrained resource	$63 (wrong)	$96 (wrong)
Total contribution margin		$3,150,000	$4,800,000
Less:	Fixed costs	0	225,000
Net relevant benefit		$3,150,000	$4,575,000