Question

Nevada Company manufactures and sells office chairs in two models: Executive and Deluxe. Product information is provided below. Deluxe Executive Unit selling price $150 $500 Unit variable costs 90 250 Unit contribution margin $ 60 $250 Machine hours required per unit 2 10 Nevada has 10,000 machine hours available each month for producing these two products. The demand for both products is such that Nevada can sell as many units of either product as it can produce. What is the maximum amount of contribution margin that the company can obtain from the available machine hours next month?
a. $250,000.
b. $600,000.
c. $300,000.
d. $2,500,000.

Answer 1

Answer:

The correct answer is c) 300,000

Explanation:

In this question machine hour is limiting factor. So in order to make most lucrative mix we will have to find which product give more contribution per limiting factor. Detail calculations are given below.

Contribution per Limiting factor (machine hour)

Executive = 60/2 = 30 per machine hour

Deluxe = 250/10 = 25 per machine hour

So

It is more profitable to produce executive chair

As demand for chairs are unlimited so company will use all its machine hour to produce executive chairs.

Contribution = 10,000 * 30 = 300,000 dollars.