Total income = $35,000
Limiting factor analysis
the company is faced with a limiting factor situation.
<em>Here the business is faced with a problem of shortage of a resource i.e machine hours which can be used to produced more than one product type. </em>
<em> To maximize the use of the resource , the business should allocate the limited resource for production purpose in </em>such a way that it maximizes the contribution per unit of the scare resource.
Therefore, the Company should allocate the machine hours to maximise the contribution per unit of oven hour. This is done as follows:
Calculate he contribution per machine hour and rank the product
Product A $8/2 hours = $4 per hour (2nd ranking)
Product B $21/3 hours = $7 per hour (1st ranking)
Product B generates a higher contribution per machine hour , therefore the company should allocate all the machine hours to product B
Calculate the Total contribution from the production of product B
Total contribution margin = $7 per hour s × 5,000 hours