Boylan’s Peanut Company located in a hidden valley in Georgia makes four different products – chocolate covered whole nuts, chocolate nut clusters, chocolate nut crunch bars, and roasted nuts. Boylan has a limited supply of nuts that are bought from secretive local growers and it is barely able to meet the steadily increasing demand for their products. On the other hand, increases in the purchase cost of peanuts and increasing foreign competition make it difficult for Boylan to maintain a reasonable profit. The demand for these healthy nut products fluctuates with seasonal tourist levels; therefore, production is budgeted on a weekly basis.
Relevant Input Information
The selling price (SP) for Boylan’s four nut products Whole, Cluster, Crunch, and Roasted are $5.00, $4.00, $3.20, and $4.50 per pound, respectively. The minimum sales demand for its popular Whole product is 1,000 pounds. The Cluster product is popular with locals and its sales are estimated between 400 and 500 pounds. The only other sales requirement is that Roasted cannot exceed 200 pounds.
During this time of the year, the local growers are able to harvest no more than the equivalent of 1,100 pounds of peanuts. The composition of peanuts within one pound of a finished product varies, Whole 60%, Cluster 40%, Crunch 20%, and Roasted 100%, with chocolate making up the balance. The peanuts cost $1.60 per pound, and chocolate costs $0.80 per pound. Therefore, the direct material cost (DMC) for the Whole product is $1.28, computed as $.96 (.6*$1.60) for nuts plus $.32 (.4*$.80) for chocolate, Cluster is $1.12, Crunch is $0.96 and Roasted is $1.60. 415
The four machines used by Boylan are old and rusty. And each product requires time on each of the four different machines – Hull, Roast, Chocolate, and Package, except for the Roasted product which does not have chocolate. The number of minutes per pound of finished product required on each machine is listed in the table below (for example, the Whole product requires 2 minutes on the Roast machine). Each machine is available 60 hours or 3,600 minutes per week.
Machine use in min/lb:Whole Cluster Crunch RoastedHull machine 1.00 1.00 1.00 1.00Roast machine 2.00 1.50 1.00 1.75Chocolate machine 1.00 0.70 0.20 0.00Package machine 2.50 1.60 2.00 1.00
Variable labor costs in running the machines are $12 per hour or $0.20 per minute for the Hull, Roast and Chocolate machines, and $6 per hour or $0.10 per minute for the Package machine. Therefore, the direct labor cost for the Whole product is $1.05, Cluster is $0.80, Crunch is $0.64, and Roasted is $0.65.
Variable manufacturing overhead costs (e.g., sugar, salt, oil and garlic) are driven by direct materials costs (DMC) for the nuts and chocolate; therefore, it is applied at a rate of 25% of DMC. The variable S&A expense (e.g., commissions and delivery costs) is 10% of the selling price (SP).The total variable costs for the products are Whole $3.15, Cluster $2.60, Crunch $2.16, and Roasted $3.10. Given the selling price for the four products, the contribution margins are Whole $1.85, Cluster $1.40, Crunch $1.04, and Roasted $1.40.
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