Question

Garson, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

	Product
	F		G		H
Selling price	$	75	$	55	$	85
Variable costs	$	50	$	40	$	55
Fixed costs	$	45	$	8	$	42
Milling machine time (minutes)		10		5		5

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

Demand for the three products exceeds the company's productive capacity. The milling machine is the constraint, with only 2,500 minutes of milling machine time available this week.

Required:

a. Given the milling machine constraint, which product should be emphasized?

b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of milling machine time?

Answer 1

a.

STATEMENT OF RANKING
Particulars	Product F	Product G	Product H
Selling Price	75.00	55.00	85.00
Less : Variable Cost	50.00	40.00	55.00
Contribution Margin	25.00	15.00	30.00
Milling Machine Time in Minutes	10	5	5
Contribution Margin per Hour of Milling Machine	150	180	360
	(25/10*60)	(15/5*60)	(30/5*60)
Ranking	III	II	I
Since Product H has highest contribution Margin per milling machine hour, so Product H should be emphasized.

b. Maximum amount per additional hour for milling machine = Contribution margin of Product H per milling machine hour

Maximum amount per additional hour for milling machine = $ 360 Per hour

Please like and for any doubt please comment. Thank You.