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 | $ | 13.10 | $ | 9.00 | $ | 9.80 | $ | 9.40 |
Direct labor | 18.20 | 26.20 | 32.40 | 39.20 | ||||
Variable manufacturing overhead | 3.10 | 1.50 | 1.40 | 2.00 | ||||
Fixed manufacturing overhead | 25.30 | 33.60 | 25.40 | 36.00 | ||||
Unit product cost | 59.70 | 70.30 | 69.00 | 86.60 | ||||
Additional data concerning these products are listed below.
Products | ||||||||
A | B | C | D | |||||
Grinding minutes per unit | 2.60 | 3.20 | 3.10 | 2.20 | ||||
Selling price per unit | $ | 74.90 | $ | 92.30 | $ | 86.20 | $ | 103.00 |
Variable selling cost per unit | $ | 1.00 | $ | 0.20 | $ | 2.10 | $ | 0.40 |
Monthly demand in units | 2,800 | 2,800 | 1,800 | 2,000 | ||||
The grinding machines are potentially the constraint in the production facility. A total of 25,400 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.)
Multiple Choice
$23.64
$6.53
$13.06
$17.25
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Bruce Corporation | ||||||
Contribution margin per grinding minute | Product A | Product B | Product C | Product D | Note | |
Selling price per unit | 74.90 | 92.30 | 86.20 | 103.00 | A | |
Direct Material per unit | 13.10 | 9.00 | 9.80 | 9.50 | B | |
Direct Labor cost per unit | 18.20 | 26.20 | 32.40 | 39.20 | C | |
Variable overhead cost per unit | 3.10 | 1.50 | 1.40 | 2.00 | D | |
Variable selling expense per unit | 1.00 | 0.20 | 2.10 | 0.40 | E | |
Contribution per unit ($) | 39.50 | 55.40 | 40.50 | 51.90 | F=A-(B+C+C+D+E) | |
Grinding minutes per unit | 2.60 | 3.20 | 3.10 | 2.20 | G | |
Contribution per minute ($) | 15.19 | 17.31 | 13.06 | 23.59 | H=F/G |
Highest Contribution margin |
For optimal utilization of grinding minutes that product will be produced first whose contribution per minute is highest. |
Product A | Product B | Product C | Product D | Total | ||
Contribution per minute ($) | 15.19 | 17.31 | 13.06 | 23.59 | See H | |
Rank | 3 | 2 | 4 | 1 | ||
Demand (Units) | 2,800.00 | 2,800.00 | 1,800.00 | 2,000.00 | I | |
Grinding minutes required | 7,280.00 | 8,960.00 | 5,580.00 | 4,400.00 | 26,220.00 | J=I*G |
Final answer: Product C has the lowest contribution so it should be produced last and any additional grinding minutes should be allocated to Product C. |
The maximum additional cost per minute on grinding machine that can be paid may equal to extra contribution earned per minute and that is contribution per minute of Product C. |
Because the demand of all other products are already fulfilled by the existing grinding times so additional time will be used only for production of C. |
So the maximum additional cost per minute will be $ 13.06 which is the contribution per minute of Product C. |
So answer is $ 13.06. |