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16 November, 10:58

Consider the following production and cost data for two products, L and C: The contribution margin per unit for Product L is $120 while the contribution margin for Product C is $112. The machine minutes needed per unit for Product L is 10 minutes while for Product C it is 8 minutes. A total of 60,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?

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  1. 16 November, 11:03
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    The largest possible total contribution margin that can be realized each period is that of product C ($840,000).

    Explanation:

    Product L has a contribution margin of $120 but it requires 10 minutes per unit. Therefore, 120/10 = 12. This means its contribution margin is $12.

    Product C has a contribution margin of $112 but it requires 8 minutes per unit. Therefore, 112/8 = 14. This means its contribution margin is $14 per minute.

    Since we have 60,000 machine minutes, we would want to spend them in the most efficient way possible.

    So,

    If we produce only product L:

    60,000 min * $12 per min = $720,000 total contribution margin

    If we produce only product C:

    60,000 min * $14 per min = $840,000 total contribution margin
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