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	$	14.90	$	10.80	$	11.60	$	11.20
Direct labor		20.00		28.00		34.20		41.00
Variable manufacturing overhead		4.90		3.30		3.20		3.80
Fixed manufacturing overhead		27.10		35.40		27.20		37.80
Unit product cost		66.90		77.50		76.20		93.80

Additional data concerning these products are listed below.

	Products
	A		B		C		D
Grinding minutes per unit		4.40		5.90		4.90		4.00
Selling price per unit	$	76.70	$	94.10	$	88.00	$	104.80
Variable selling cost per unit	$	2.80	$	1.80	$	3.90	$	2.20
Monthly demand in units		4,600		4,600		3,600		2,600

The grinding machines are potentially the constraint in the production facility. A total of 74,700 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 your intermediate calculations to 2 decimal places.)

Multiple Choice

$11.65

$3.58

$7.16

$9.81

Answer 1

Product	Grinding Time per Unit	Demand (Units)	Total Grinding minutes required
A	4.40	4,600	20,240
B	5.90	4,600	27,140
C	4.90	3,600	17,640
D	4.00	2,600	10,400
		Total	75,420

Since total available grinding time is 74,700 minutes only, demand for all the product cannot be satisfied

Units that give highest contribution per minute of grinding time will be produced first.

Procuct	A	B	C	D
Selling Price	76.7	94.1	88	104.8
Variable Costs:
- Direct Material	14.9	10.8	11.6	11.2
- Direct Labour	20	28	34.2	41
- Variable Mfg. Overhead	4.9	3.3	3.2	3.8
- Variable Selling Cost	2.8	1.8	3.9	2.2
Contribution Margin	34.1	50.2	35.1	46.6
Grinding minutes per Unit	4.4	5.9	4.9	4
Contribution Margin per Grinding Minute	7.75	8.51	7.16	11.65
Ranking of Production	3rd	2nd	4th	1st
Grinding minutes alloted as per ranking	20,240	27,140	16,920	10,400
			(Balancing Minutes allocated)

Thus for every additional grinding minute the company can maximum pay $ 7.16 (Contribition Margin per Grinding Minute of Product C)