In: Accounting
Bruce Corporation makes four products in a single facility. These products have the following unit product costs:
Products | ||||||||
A | B | C | D | |||||
Direct materials | $ | 14.80 | $ | 10.70 | $ | 11.50 | $ | 11.10 |
Direct labor | 19.90 | 27.90 | 34.10 | 40.90 | ||||
Variable manufacturing overhead | 4.80 | 3.20 | 3.10 | 3.70 | ||||
Fixed manufacturing overhead | 27.00 | 35.30 | 27.10 | 37.70 | ||||
Unit product cost | 66.50 | 77.10 | 75.80 | 93.40 | ||||
Additional data concerning these products are listed below.
Products | ||||||||
A | B | C | D | |||||
Grinding minutes per unit | 4.30 | 5.80 | 4.80 | 3.90 | ||||
Selling price per unit | $ | 76.60 | $ | 94.00 | $ | 87.90 | $ | 104.70 |
Variable selling cost per unit | $ | 2.70 | $ | 1.70 | $ | 3.80 | $ | 2.10 |
Monthly demand in units | 4,500 | 4,500 | 3,500 | 2,500 | ||||
The grinding machines are potentially the constraint in the production facility. A total of 71,400 minutes are available per month on these machines.
Direct labor is a variable cost in this company.
Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round your intermediate calculations to 2 decimal places.)
Solution:
Computation of contribution margin per unit of constrained resource | ||||
Particulars | Product A | Product B | Product C | Product D |
Selling price per unit | $76.60 | $94.00 | $87.90 | $104.70 |
Variable cost per unit: | ||||
Direct material | $14.80 | $10.70 | $11.50 | $11.10 |
Direct labor | $19.90 | $27.90 | $34.10 | $40.90 |
Variable manufacturing overhead | $4.80 | $3.20 | $3.10 | $3.70 |
Variable selling cost | $2.70 | $1.70 | $3.80 | $2.10 |
Contribution margin per unit | $34.40 | $50.50 | $35.40 | $46.90 |
Grinding minutes per unit | 4.3 | 5.8 | 4.8 | 3.9 |
Contribution margin per minute of grinding machine | $8.00 | $8.71 | $7.38 | $12.03 |
Company will first allocate the resources to Product D as it is offering highest contribution margin per minute of grinding machine, then to product B, A and C respectively.
Grinding machine time used for production of:
Product D = 2500 * 3.90 = 9750 minutes
Product B = 4500*5.80 = 26100 minutes
Product A = 4500*4.3 = 19350
Available time = 71400 - (9750 + 26100 + 19350) = 16200 minutes
Maximum possible units of product C = 16200 / 4.80 = 3375 units
Therefore in order to meet demand of Product C, company is willing to pay maximum $7.38 per minute of grinding machine time.