Question

Information regarding the selling prices and unit costs of three products is as follows:

	Product
	F		G		H
Selling price	$	70	$	50	$	80
Variable costs	$	30	$	20	$	35
Fixed costs	$	10	$	7	$	7
Machine time (minutes)		10		5		5

Fixed costs are applied to the products on the basis of direct labor hours.

Due to the amount of machine time available, the company cannot produce all the units demanded. The only constraint is machine time and there are only 2,400 minutes of machine time available this week.

Required:

a. Given the machine constraint, what should the company focus on to make the production decision?

b. Based on your answer to part (a), calculate that amount for each product.

c. Which product should be emphasized?

Answer 1

Product F

Contribution margin = Selling price - Variable cost

= 70 - 30

= $40

Contribution margin per constraint

= 40/10

= $4

Product G

Contribution margin = Selling price - Variable cost

= 50 - 20

= $30

Contribution margin per constraint

= 30/5

= $6

Product H

Contribution margin = Selling price - Variable cost

= 80 - 35

= $45

Contribution margin per constraint

= 45/5

= $9

as the machine time is a constant for the company therefore the company should take the production decision based on the contribution margin per constant which will maximize the profit of the company.

2)

as per the above calculation contribution margin for constant machine minutes has been calculated in which the product H has the highest contribution margin per machine minutes.

3)

As the contribution margin per constant it is highest for product H therefore the company should focus on producing the maximum of product H.

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