Question

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

	Products
	A		B		C		D
Direct materials	$	19.90	$	15.20	$	20.80	$	23.20
Direct labor		12.20		8.70		10.50		7.40
Variable manufacturing overhead	$	1.60	$	2.10	$	2.00	$	2.10
Fixed manufacturing overhead		10.80		11.90		8.80		10.70
Unit product cost		44.50		37.90		42.10		43.40

Additional data concerning these products are listed below.

	Products
	A		B		C		D
Grinding minutes per unit		1.20		0.70		0.60		0.60
Selling price per unit	$	59.30	$	51.70	$	59.50	$	55.60
Variable selling cost per unit	$	3.60	$	1.50	$	2.20	$	3.60
Monthly demand in units		4,000		2,000		4,000		2,000

The grinding machines are potentially the constraint in the production facility. A total of 9,800 minutes are 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

Procuct	A	B	C	D
Selling Price	59.3	51.7	59.5	55.6
Variable Costs:
- Direct Material	19.9	15.2	20.8	23.2
- Direct Labour	12.2	8.7	10.5	7.4
- Variable Mfg. Overhead	1.6	2.1	2	2.1
- Variable Selling Cost	3.6	1.5	2.2	3.6
Contribution Margin	22	24.2	24	19.3
Grinding minutes per Unit	1.2	0.7	0.6	0.6
Contribution Margin per Grinding Minute	18.33	34.57	40.00	32.17
Ranking of Production	4th	2nd	1st	3rd

In case the grinding minutes is constraint i.e. if demand of all product can not be satisfied, the company can pay maximum of $ 18.33 per grinding minute.

In our case based on demand of individual products and total grinding time taken, entire demand is satisfied with 9,800 grinding minutes.

Product	Grinding Time per Unit	Demand (Units)	Total Grinding minutes required
A	1.2	4,000	4,800
B	0.7	2,000	1,400
C	0.6	4,000	2,400
D	0.6	2,000	1,200
		Total	9,800