Question

A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $8 and takes two machine hours to make and Product B has a unit contribution margin of $18.0 and takes three machine hours to make. If there are 5000 machine hours available to manufacture a product, income will be:

Answer 1

Answer:

Income = $30,000

Explanation

Whenever a company is faced with a limiting factor i.e a resource in short supply, the company should allocate the resource to the product with he highest contribution per unit of the scare resource

Product       Cont/unit          machine hr /unit    cont/hr    Ranking

A                    $8                    2 hrs                      $4/hr             2nd  

B                    $18                  3 hrs                       $6/hr            1st

Hence the company should allocate the resource to the product B

Hence the total contribution

= 5000 hrs × $6 per hr.

= $30,000

Income = $30,000