Question

ABC, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below: Product A Product B Product C Selling price $80 $60 $90 Variable costs 30 35 54 Fixed costs 25 10 22 Molding machine time (minutes) 10 5 7 Fixed costs are applied to the products on the basis of direct labor hours. The company estimates that it can sell 300 units of each product per week. The molding machine is the constraint, with only 3,500 minutes available this week. (1). Given the machine time constraint, which product should be emphasized

Answer 1

Answer:

ABC, Inc.

Given the machine time constraint, Product C should be emphasized.

Explanation:

a) Data and Calculations:

                                               Product A     Product B      Product C

Selling price                                 $80              $60               $90

Variable costs                                30                35                  54

Fixed costs                                    25                 10                  22

Molding machine time (minutes)  10                   5                    7

Estimated sales per week         300               300               300

Total molding machine time   3,000            1,500             2,100

Contribution                               $50               $25               $36

Contribution per molding time    $5                 $5                $5.14

Net income per unit                   $25               $15                $14

Net income per molding time   $2.50              $3                $2

b) The criterion for making the decision is contribution per molding time because fixed cost is not relevant in this decision.  Product C produces a slightly higher contribution per minute than Products A and B.  Therefore, it should be emphasized more than other products, though consideration should also be given to the fixed cost per unit if its allocation is based on the ABC system.