Question

Dustin Co. makes three products, A, B and C.

They have a constrained resource - machine hours. There are only 17,892 machine hours available a month.

The three products have the following data:

	A	B	C
Selling Price per unit	6.00	16.00	11.00
Variable Cost per unit	2.00	4.00	6.00
Machine hours required	2	4	5
Demand for product in units	1,114	4,125	1,073

How much of product B should be produced?

Answer 1

First we will calculate the contribution margin per unit and contribution margin in terms of machine hours (as machine hours are limiting factor) for each product as below:

Contribution margin per unit = Selling price per unit - Variable cost per unit

Product A:

Contribution margin per unit = $6 - $2 = $4

Contribution margin per machine hour = Contribution margin per unit / Machine hours required

Contribution margin per machine hour = $4 / 2 = $2

Product B:

Contribution margin per unit = $16 - $4 = $12

Contribution margin per machine hour = Contribution margin per unit / Machine hours required

Contribution margin per machine hour = $12 / 4 = $3

Product C:

Contribution margin per unit = $11 - $6 = $5

Contribution margin per machine hour = Contribution margin per unit / Machine hours required

Contribution margin per machine hour = $5 / 5 = $1

From the above, we can see that contribution margin per machine hour for product B is highest. So, product B should be produced first.

Demand for product B = 4125 units

Machine hours needed to meet the demand for product B = 4125 * 4 = 16500

So, out of 17892 machine hours available, 16500 hours will be used for production of B.

All 4125 units of product B should be produced first.