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	$	14.45			$	10.35			$	11.15			$	10.75
Direct labor		19.55				27.55				33.75				40.55
Variable manufacturing overhead		4.45				2.85				2.75				3.35
Fixed manufacturing overhead		26.65				34.95				26.75				37.35
Unit product cost	$	65.10			$	75.70			$	74.40			$	92.00

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	$	76.25			$	93.65			$	87.55			$	104.35
Variable selling cost per unit	$	2.35			$	1.35			$	3.45			$	1.75
Monthly demand in units		4,060				4,060				3,060				2,060

The grinding machines are the constraint in the production facility. A total of 53,900 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

Solution :

(1) Contribution per Minute of Grinding Machine :

	A	B	C	D
Sale Price per Unit	76.25	93.65	87.55	104.35
Direct Material	14.45	10.35	11.15	10.75
Direct Labor	19.55	27.55	33.75	40.55
Variable OH	4.45	2.85	2.75	3.35
Variable Selling Cost	2.35	1.35	3.45	1.75
Contribution per Unit	$ 35.45	$ 51.55	$ 36.45	$ 47.95
Grinding Minutes per Unit	3.80	5.30	4.30	3.40
Contribution per Minute	$ 9.33	$ 9.73	$ 8.48	$ 14.10

(2) Current Utilization of Machine :

Total Available Minutes	53,900
Less : Production of D (2,060 * 3.40)	7004
Available Minute after D	46,896
Less : Production of B (4,060 * 5.30)	21,518
Available Minute after B	25,378
Less : Production of A (4,060 * 3.80)	15,428
Available Minute after A	9,950
Minutes required for Production of C (3,060 * 4.30)	13,158

(2) Conclusion : Since the demand of product C is not fulfiled company can pay additional $ 8.48 per Minute which is the contribution per Minute of Product C.

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