Question

JK Company can sell all of the plush and supreme products it can produce, but it has limited production capacity. It can produce 4 plush units per hour or 2 supreme units per hour, and it has 3,700 production hours available. Contribution margin per unit is $231 for the plush product and $317 for the supreme product. What is the total contribution margin if JK chooses the most profitable sales mix?

Answer 1

Answer:

$3,418,800

Explanation:

Contribution margin per hour:

Plush: 4 units per hour x $231 = $924

Supreme: 2 units per hour x $317 = $634

Since contribution margin per hour from Plush is higher than Supreme, we select Plush as the most profitable sales. Hence,

Total contribution = 3,700 hours available x $924 = $3,418,800

Hope this helps!

Answer 2

Answer:

Total Contribution Margin by choosing most profitable sales mix = 3,418,800$

Explanation:

Given Data:

Total Production Hours = 3,700 Hours

Production Hours required for Plush (P) Units = 1/4 = 0.25 Hours

Production Hours required for Supreme (S) Units = 1/2 = 0.5 Hours

Total Production Hours (PH) will be given by:

PH = 0.25 P + 0.5 S - Say equation 1

Similarly we have:

Contribution margin from Plush (P) Units = 231 $

Contribution margin from Supreme (S) Units = 317$

Total Contribution Margin:

Contribution Margin = 231 P +317 S - Say equation 2

Now using intuitive approach:

Since we Supreme units consume 50% more production hours as compared to Plush units whereas on the other side, Supreme Units give only 38% ((317-231)/231)*100) more contribution margin, So our target will be to produce minimum possible Supreme Units.

Thus as far as their are no production constraints on Supreme units (as in the given question), we will produce only Plush units for all given 3700 production hours.

Thus by using equation 1, and putting S=0 & PH = 3700, we get:

3700 = 0.25 P + 0

P = 14,800 Units

Now using equation 2 we will have total contribution margin by putting P = 14,800 & S=0 as under:

Contribution Margin = (231 * 14800) + (317 * 0)

Total Contribution Margin = 3,418,800$