Crane Company can produce and sell only one of the following two products: Oven Contribution Hours Required Margin Per Unit Muffins 0.2 $4 Coffee Cakes 0.3 $5 The company has oven capacity of 3000 hours. How much will contribution margin be if it produces only the most profitable product?

Given:

Muffins

Contribution hours = 0.2

Margin per unit = $4

Coffee Cakes

Contribution hours = 0.3

Margin per unit = $5

Required margin per unit contribution hours, muffins = 4/0.2

= $ 20

Required margin per unit contribution hours, coffee cakes = 5/0.3

= $ 16.67

For the most profitable product, muffins = $ 20 per unit contribution hours.

At 3000 hours of oven contribution hours,

Contribution margin = $ 20 * 3000

= $ 60,000 per unit.

The question is reproduced in the table below for clarity

Oven Contribution

Hours Required Margin Per Unit

Muffins 0.2 $4

Coffee Cakes 0.3 $5

Answer:

Total contribution margin = $ 60,000.00

Explanation:

When a business is faced with a problem of shortage of a resource which can be used to produced more than one product type, to maximize the use of the resource, the business should allocate it for production purpose in such a way that it maximizes the contribution per unit of the scare resource.

Therefore Crane Company should alocate the oven hours to maximise the contribution per unit of oven hour. This is done as follows:

Step 1

Calculate he contribution per oven hour and rank the product

cont/hr ranking

Muffin $4/0.2 hour = 20 1st

Coffee cakes $5/0.3 hour = 16.67 2nd

Because Muffin generates the highest contribution per hour of Oven, Crane should allocate all the resource to it

Step 2

Calculate the Total contribution from the production of Muffin

Total contribution margin = 20 per her * 3000

= $ 60,000.00