Question

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

	Products
	A				B				C				D
Direct materials	$	14.30			$	10.20			$	11.00			$	10.60
Direct labor		19.40				27.40				33.60				40.40
Variable manufacturing overhead		4.30				2.70				2.60				3.20
Fixed manufacturing overhead		26.50				34.80				26.60				37.20
Unit product cost	$	64.50			$	75.10			$	73.80			$	91.40

Additional data concerning these products are listed below.

	Products
	A				B				C				D
Grinding minutes per unit		3.80				5.30				4.30				3.40
Selling price per unit	$	76.10			$	93.50			$	87.40			$	104.20
Variable selling cost per unit	$	2.20			$	1.20			$	3.30			$	1.60
Monthly demand in units		4,000				4,000				3,000				2,000

The grinding machines are the constraint in the production facility. A total of 53,600 minutes is 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 off to the nearest whole cent.)

Answer 1

Products will be produced in the order of contribution margin per unit of constraint
	A	B	C	D
Selling price per unit	76.1	93.5	87.4	104.2
Direct material	14.3	10.2	11	10.6
Direct labor	19.4	27.4	33.6	40.4
Variable manufacturing overhead	4.3	2.7	2.6	3.2
Variable selling cost	2.2	1.2	3.3	1.6
Contribution margin per unit	35.9	52	36.9	48.4
Grinding minutes per unit	3.8	5.3	4.3	3.4
Contribution margin per minute	9.45	9.81	8.58	14.24
Production mix will be as follows
Product	Units	Minutes per unit	Total minutes
A	4000	3.8	15200
B	4000	5.3	21200
C	2,418.60	4.3	10400
D	2000	3.4	6800
		Total	53600
Hence, additional time will be used to Produce C
Amount paid will be equal to the contribution margin per minute
i.e. $8.58