Question

Coronado Industries can sell all the units it can produce of either Plain or Fancy but not both. Plain has a unit contribution margin of $80 and takes two machine hours to make and Fancy has a unit contribution margin of $93 and takes three machine hours to make. There are 2400 machine hours available to manufacture a product. What should Coronado do?

Answer 1

Answer:

It will be better to produce all the units of Plain we can sell, then use any remaining machine hours to produce Fancy. This is because Plain, generated more contribution per hour than Fancy.

Explanation:

We have to calculate the Contribution Margin per machine hours

This means check which product makes a better use of the scarse resourse

$\frac{Plain\: CM}{Plain \: Machine \: Hours } = CM \: per \:Machine\:Hour\\\\ 80 \div 2 = 40$

$\frac{Fancy\: CM}{Fancy\: Machine \: Hours } = CM \: per \:Machine\:Hour\\\\ 93 \div 3 = 31$

It will be better to produce all the units of Plain we can sell, then use any remaining machine hours to produce Fancy