Question

32.

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

	Products
	A	B	C	D
Direct materials	$14.50	$10.40	$11.20	$10.80
Direct labor	19.60	27.60	33.80	40.60
Variable manufacturing overhead	4.50	2.90	2.80	3.40
Fixed manufacturing overhead	26.70	35.00	26.80	37.40
Unit product cost	$65.30	$75.90	$74.60	$92.20

Additional data concerning these products are listed below.

	Products
	A	B	C	D
Grinding minutes per unit	4.00	5.50	4.50	3.60
Selling price per unit	$76.30	$93.70	$87.60	$104.40
Variable selling cost per unit	$ 2.40	$ 1.40	$ 3.50	$ 1.80
Monthly demand in units	4,200.00	4,200.00	3,200.00	2,200.00

The grinding machines are potentially the constraint in the production facility. A total of 53,800 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 and final answer to 2 decimal places.)

$10.95

$13.28

$4.04

$8.07

Answer 1

Solution:

Computation of contribution margin per minute of Grinding machine
Particulars	Product A	Product B	Product C	Product D
Selling price per unit	$76.30	$93.70	$87.60	$104.40
Variable cost per unit:
Direct materials	$14.50	$10.40	$11.20	$10.80
Direct labor	$19.60	$27.60	$33.80	$40.60
Variable manufacturing overhead	$4.50	$2.90	$2.80	$3.40
Variabel selling expenses	$2.40	$1.40	$3.50	$1.80
Contribution margin per unit	$35.30	$51.40	$36.30	$47.80
Grinding minutes per unit	4	5.5	4.5	3.6
Contribution margin per minute	$8.83	$9.35	$8.07	$13.28
Rank	3	2	4	1

First available machine time will be utilized in manufacturing of product D, B, A and C respectively.

Total time required to meet demand of Product D = 2200*3.60 = 7920 minutes

Total time required to meet demand of Product B = 4200*5.50 = 23100 minutes

Total time required to meet demand of Product A = 4200*4 = 16800 minutes

Time available for product C = 53800 - (7920 + 23100 + 16800) = 5980 minutes

Time required to meet demand of product C = 3200*4.50 = 14400 minutes

Therefore company is 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 = Contribution margin per minute of product C = $8.07

Hence last option is correct.