Question

Bruce Corporation makes four products in a single facility. These products have the following unit product costs:

	Products
	A		B		C		D
Direct materials	$	16.30	$	20.20	$	13.20	$	15.90
Direct labor		18.30		21.70		16.10		10.10
Variable manufacturing overhead		5.10		6.30		8.80		5.80
Fixed manufacturing overhead		28.20		15.10		15.20		17.20
Unit product cost	$	67.90	$	63.30	$	53.30	$	49.00

Additional data concerning these products are listed below.

	Products
	A		B		C		D
Grinding minutes per unit		2.35		1.45		1.05		0.65
Selling price per unit	$	82.20	$	74.60	$	71.40	$	66.10
Variable selling cost per unit	$	3.30	$	3.80	$	3.50	$	4.20
Monthly demand in units	3,700		2,700		2,700		4,700

The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Which product makes the MOST profitable use of the grinding machines? (Round your intermediate calculations to 2 decimal places.)

• Product C

• Product D

• Product B

• Product A

Answer 1

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Bruce Corporation
Contribution margin per grinding minutes	Product A	Product B	Product C	Product D	Note
Selling price per unit	82.20	74.60	71.40	66.10	A
Less: Variable cost per unit
Direct materials	16.30	20.20	13.20	15.90
Direct labor	18.30	21.70	16.10	10.10
Variable manufacturing overhead	5.10	6.30	8.80	5.80
Variable selling cost per unit	3.30	3.80	3.50	4.20
Total Variable cost per unit	43.00	52.00	41.60	36.00	B
Contribution per unit ($)	39.20	22.60	29.80	30.10	C=A-B
Grinding minutes per unit	2.35	1.45	1.05	0.65	D
Contribution margin per grinding minutes ($)	16.68	15.59	28.38	46.31	E=C/D

Maximum Contribution margin

For optimal utilization of grinding machine that product will be produced first whose contribution margin per grinding minutes is highest.

So maximum Contribution margin is Contribution margin per grinding minutes of Product D i.e. $ 46.31.

So product D makes the MOST profitable use of the grinding machines.

Note: Fixed cost is a sunk cost and should not ne considered for this purpose.