Question

Wicha Company produces three products with the following information:

	Product
	Good	Better	Best
Selling price per unit	$17	$19	$26
Variable cost per unit	$8	$10	$12
Machine-hours per unit (MH/unit)	2	3	4

The company has a limit of 14,300 machine-hours available per month and a monthly fixed cost of $35,000. The demand for each of the products is 2,500 units per month.

The company’s goal is to maximize its profitability.

Suppose the company can rent a machine that will provide an additional 1,360 machine-hours per month.

Q) What is the maximum monthly rent the company should be willing to pay for this machine (assuming they’ve made optimal use of their own machine)?

Answer 1

		Good	Better	Best	Total
a)	SP/ unit	$           17	$              19	$              26	$               -
b)	VC / unit	$              8	$              10	$              12	$               -
c)	Contribution / unit	$              9	$                9	$              14	$               -
	(a - b)
d)	Machine Hour / unit	$              2	$                3	$                4	$               -
e)	Contribution / MHR	$        4.50	$          3.00	$          3.50	$               -
	(c/d)
f)	Ranking of priority	1st	3rd	2nd
g)	Demand (units)	$     2,500	$        2,500	$        2,500	$               -
h)	MHR required	$     5,000	$        7,500	$      10,000	$      22,500
	(gxd)
i)	MHR available				$      14,300
j)	MHR allocation on	$     5,000	$               -	$        9,300	$      14,300
	the basis of ranking
k)	MHR shortage (h-j)	$            -	$        7,500	$            700	$        8,200
l)	Allocation of MHR from a	$            -	$            660	$            700	$        1,360
	rented machine		(bal. fig.)
m)	Contribution from production
	of units from a rented machine	$            -	$        1,980	$        2,450	$        4,430
	(exl)

Hence, the maximum rent that can be paid for the machine if $4,430.