Question

Consider the following production and cost data for two products, L and C: Product L Product C Contribution margin per unit $24 $18 Machine-hours needed per unit 3 hours 2 hours The company can only perform 14,200 machine hours each period, due to limited skilled labor and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?

Answer 1

Answer:

Largest possible total contribution margin = $127,800

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

The highest contribution from the 4,200 machine hours could be determined as follows:

Step 1 : Contribution per hour

Contribution per machine hour = contribution per unit/ machine hour

                                                Product L         Product C

                                                      $                             $

Contribution                               24                           18      

Machine hour                             3                              2

Contribution per hour             8/ hr                           9/hr

Ranking                                       2nd                         1st

Product C would be produced using the entire machine hours. Doing so would generate the highest contribution possible.

Contribution = contribution per hour ×   machine hours

                     =       9 ×  14,200 = $127,800

Largest possible total contribution margin = $127,800