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The following two tables show the estimated machine hours for each of the three machines broken down by product for 1992 and 1993 (see tab Q1 of attached spreadsheet for calculations):
We came up with these estimated machine hours by comparing total products produced/sold from Exhibit 3 with the total units each machine could produce per hour in Exhibit 4. ...
From these numbers, we can infer that the production manager adjusted machine hours per product by the % change in total production (appears through marginal analysis). Overall production increased 100% in 1993 for product K & increased total machine hours 100% (same changes for the other two products-reductions of 20% & 17% respectively) (see tab Q1). ... However, Machines A,B, & C all produced different products at differing rates. ...
We did some analysis using actual (ABC) fixed overhead allocation in 1992 and came up with overhead rates for products I, J, &K of $1. ... Finally we analyzed the variance to CM by using the ABC versus current allocation method and using ABC in 1992 and 1993, products I&J were producing net profits while product K was producing at a net loss. By basing production shifts on inaccurate methodology and overhead allocation, California shifted production away from profitable products toward the unprofitable product. ... Sure K made some more, but not enough because as we explain here, it was the bottleneck (see tab Q2 for analysis). ... This is significantly less than the other products. ... If we further examine the situation by looking at the CM per hr we see that products I and J basically yield the same CM every hour, but K, once again, is significantly less (by almost 1/3). ...
To determine the product mix we start by looking at our answer to question 2, and then we further support our recommendation with analysis we conducted for question 4. ... From question 2, we can see that it is eating away at valuable machine time that could be used to make more of the products that actually make the company money. ... First, the sales of any and all of the products can grow as high as production can meet. ... By dropping product K you lose some CM but the extra sales in the other two products more than make up for it.
Approximate Word count = 1831
Approximate Pages = 7.3
(250 words per page double spaced)
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