Question

Kirkland manufactures two products (A & B). Both products include emitrol and ullocide as part of the materials for productions. The costs below are computed at a monthly capacity level of 10,000 units of each product. Kirkland has more demand for each of the two products than it can meet. It as been operating at capacity for the last year.

	Product A	Product B
Sales price per unit	340	730
Variable cost per unit	100	280
Common fixed costs per unit	42	76
Ounces of emitrol needed per unit	1	25
Ounces of ullocide needed per unit	4	10

1. What is the contribution margin per unit for Product A?

2. What is the contribution margin per unit for Product B?

3. Kirkland has learned that there is a shortage of emitrol. Next month, only 8100 ounces of emitrol will be available for use. Which product should Kirkland produce, given these facts? Type just A or B

4. Assume the limitation stated in question 3. What is the projected total contribution margin for Kirkland next month if they choose to only produce Product A?

5. Assume the limitation stated in question 3. What is the projected total contribution margin for Kirkland next month if they choose to only produce Product B?

Answer 1

Contribution = Sales - Variable cost

1. Statement showing contribution margin per unit of product A
	Product A
Sales price per unit (1)	340
Variable cost per unit (2)	100
Contribution margin per unit (1)-(2)	240

2. Statement showing contribution margin per unit of Product B
	Product B
Sales price per unit (1)	730
Variable cost per unit (2)	280
Contribution margin per unit (1)-(2)	450

3. It is given that emitrol has limited supply of 8100 ounces next month.

Which product should Kirkland produce depend on contribution per ounce of emitrol which is a scarce resource.

Statement showing contribution per ounce of emitrol
	Product A	Product B
Contribution per unit (1)	240	450
Ounces of emitrol required per unit (2)	1	25
Contribution per ounce of emitrol (3)= (1)/(2)	240	18

As the contribution per ounce of emitrol is higher for Product A, Kirkland should produce Product A.

4. If emitrol is available only 8100 ounces and if they chose to only produce Product A:

Emitrol required per unit of Product A = 1 ounce.

Therefore for 8100 ounces, 8100 units of Product A can be produced.

Contribution per unit of Product A is $240.

Total contribution if they choose only Product A = 8100 units*@240 = $1944000.

5. If emitrol is available only 8100 ounces and if they chose to only produce Product B:

Emitrol required per unit of Product B is 25 ounces

Possibel no of units of product B = 8100/25 = 324 units

Contribution per unit of Product B is $450

Total contribuion if they chose only product B = 324 units*$450 = $145800