Holden Company produces three products, with costs and selling prices as follows

Question

Holden Company produces three products, with costs and selling prices as follows:

A particular machine is a bottleneck. On that machine, 3 machine hours are required to produce each unit of Product A, 1 hour is required to produce each unit of Product B, and 2 hours are required to produce each unit of Product C. In which order should it produce its products?

Can you please show the work as well so that I understand exactly

Product A Product B Product C selling price per unit $30 100% $20 100% $15 100% variable costs per unit $18 60% $15 75% $6 40% contribution margin per unit $12 40% $5 25% $9 60%

Explanation / Answer

Here, we can see that Product C has the highest contribution margin of all the 3 products. If we consider that the machine is working for 24 hours , in that case highest priority should be to produce product C , then A and finally B respectively in order of their respective contribution margin.

If we assume that we need to produce a minimium of one product in a day , then the order of production should be:

So we produce only 1 unit of Product A & B each , which utiliizes 4 machine hours. Rest 20 hours to be utlized for producing 10 units of Product C, as below :

So , if the above order is followed Holden Company will have the highest contribution and will have the best utilization of its machine hours.

Product Unit Total Hours Remarks Prod B 1 1 @1 hr per unit Prod A 1 3 @3 hr per unit Total 2 4

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