Question

Wasp company produces three products with the following information:

	Product
	A	B	C
Selling price per unit	$17	$19	$26
Variable cost per unit	$8	$10	$12
Machine-hours per unit (MH/unit)	2	3	4

The company has a limit of 13,800 machine-hours available per month and a monthly fixed cost of $7,500. The demand for each of the products is 2,500 units per month.

The company’s goal is to maximize its profitability.

Suppose the company can rent a machine that will provide an additional 1,860 machine-hours per month.

Q.) What is the maximum monthly rent the company should be willing to pay for this machine (assuming they’ve made optimal use of their own machine)?

A.) $   

Answer 1

Working Notes: 1
	Calculation of Contribution margin per unit of Machine hours and ranking of the same
		Product A	Product B	Product C
	Selling Price	$                            17	$                             19	$                          26
	Less: Variable Cost	$                               8	$                             10	$                          12
	Contribution Margin	$                               9	$                                9	$                          14
	Divide By	"/" By	"/" By	"/" By
	Machine hours required per unit of production	2	3	4
	Equals to =
	Contribution Margin Per machine hours	$                           4.5	$                            3.0	$                         3.5
	Ranking of the same	1st	3rd	2nd
Working Notes: 2
	Calculation of optimum production for maximum contribution margin without hiring of machine
		Units	Machine hrs required	Total hrs used	Balane Hrs Avaialbe
	Total Hrs Avaialble				13800
	Product A	2500	2	5000	8800
	Product C	2200	4	8800
	Maximum Contribution:	Units	Contribution Per Machine Hrs	Total Contribution
	Product A	2500	$                            4.5	$                  11,250
	Product C	2200	$                            3.5	$                    7,700
			Total	$                  18,950
Working Notes: 3
	Calculation of optimum production for maximum contribution margin with hiring of machine
		Units	Machine hrs required	Total hrs used	Balane Hrs Avaialbe
	Total Hrs Avaialble(13,800 + 1860)				15660
	Product A	2500	2	5000	10660
	Product C	2500	4	10000	660
	Product B	220	3	660	0
	Maximum Contribution:	Units	Contribution Per Machine Hrs	Total Contribution
	Product A	2500	$                            4.5	$                  11,250
	Product C	2500	$                            3.5	$                    8,750
	Product b	220	$                            3.0	$                        660
			Total	$                  20,660
Solution:
	Calculation of maximum monthly rent should willing to pay
	Total Contribution after machine hire	$                    20,660
	Less: Total Contribution before machine hire	$                    18,950
	Increamental contribution	$                      1,710
	So Maximum allowed rent for mahcine hired is $ 1,710
	Answer = $1,710