Allocating Limited Resources 5. A limitation of 3,000 machine-hours per week pre

Question

Allocating Limited Resources         

5.   A limitation of 3,000 machine-hours per week prevents Manhattan Manufacturing Company from meeting the sales demands for its products. The product information is as follows:

R1

R2

R3

R4

Unit selling price

$900

$600

$350

$600

Unit variable costs

- 600

- 250

- 200

- 300

Unit contribution margin

$300

$350

$150

$300

Machine-hours per unit

20

20

20

30

Assuming unlimited demand for each product, determine what is the best short-run profit maximizing strategy?

R1

R2

R3

R4

Unit selling price

$900

$600

$350

$600

Unit variable costs

- 600

- 250

- 200

- 300

Unit contribution margin

$300

$350

$150

$300

Machine-hours per unit

20

20

20

30

Explanation / Answer

Here decision will be based on the contribution margin we can have by using machine hours

so we need contribution per hour in oorder to find out best short run profit maximisation strategy because demand is unlimited for each product

therefore we will be willing to produce the product which will be offering highest contribution margin per hour of machine used

SO THE BEST SHORT RUN PROFIT MAXIMIZING STRATEGY IS TO PRODUCE R2

WE HAVE 3000 MACHINE HOPURS AVAILABLE SO 3000/20 = 150 UNITS OF R2 CAN BE PRODUCED

WHICH WILL PROVIDE CONTRIBUTION MARGIN OF $ 26250
150*$17.50 = $2625

Particulars R1 R2 R3 R4 unit contribution margin (A) $300 $350 $150 $300 Machine hours per unit (B) 20 20 20 30 So contribution margin per hour (C) = (A)/(B) $15 $17.50 $7.50 $10

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