Question

Contribution Margin with Resource Constraints. CyclePath Company produces two different products that have the following price and cost characteristics.

	Bicycle	Tricycle
Selling price per unit	$200	$100
Variable cost per unit	$120	$  50

Management believes that pushing sales of the Bicycle product would maximize company profits because of the high contribution margin per unit for this product. However, only 50,000 labor hours are available each year, and the Bicycle product requires 4 labor hours per unit while the Tricycle model requires 2 labor hours per unit. The company sells everything it produces.

Required:

Calculate the contribution margin per unit of constrained resource for each model.

Which model would CyclePath prefer to sell to maximize overall company profit? Explain.

Answer 1

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Part -1
	Bicycle	Tricycle
Selling price per unit	$       200	$       100
Variable cost per unit	$       120	$         50
Contribution Margin per unit	$         80	$         50
Hours Per unit	4	2
CM per Hour	$         20	$         25
Part -2
Since Contribution Margin per constraint resource is higher for tricycle, cyclepath should prefer to sell TRICYCLE more to maximized profit