Question

Consider the following production and cost data for two products, X and Y:Product X ProductYContribution margin per unit............................. $24 $18Machine-hours needed per unit........................ 3 hours 2 hoursThe company has 15,000 machine hours 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?a. $120,000b. $125,000c. $135,000d. $150,000

Answer 1

Answer:

c. $135,000

Explanation:

We will compare the contribution per machine hour as machine hours are limited.

Computing contribution per machine hour

Product                                      X             Y

Contribution per unit                $24         $18

Machine hours per unit              3              2

Contribution per machine

hour                                             $\frac{24}{3}$              $\frac{18}{2}$

                                                     = $8             = $9

Since contribution per machine hour is higher of product Y, thus maximum production of Product Y will be done, in that case total units that can be produced of Y = 15,000 hours/ 2 hours per unit = 7,500 units

Total contribution = 7,500 X $18 per unit = $135,000

Thus correct option is c. $135,000