6. Depp Company manufactures and sells three products. Relevant per unit data co

ID: 2559476 • Letter: 6

Question

6. Depp Company manufactures and sells three products. Relevant per unit data concerning each product are given below Product $12 $ 8 S15 S 9 $11 Selling price Variable costs and expenses$4 Machine hours to produce Instructions (a) Compute the contribution margin per unit of the limited resource (machine hour) for each product. (b) Assuming 3,000 machine hours are available, which product should be manufactured? (Assume that demand for each product is unlimited) (c) Prepare an analysis showing the total contribution margin if the hours are (1) divided equally among the products, and (2) allocated entirely to the product identified in (b) above (d) Assuming 3,000 machine hours are available, which product(s) should be manufactured assuming demand for Product A is 800 units; demand for Product HB is ,000 units; and demand for Product C is 1,200 units. What would be the total contribution margin'?

Explanation / Answer

Solution:

This question is related to the Key factor. Hence we need to understand first what is key factor?

Part 1 – Contribution Margin per unit per machine hour

1) Contribution Margin Per Unit Per Machine Hour

Contribution Margin per unit (Unit Selling Price - Unit Variable Cost) (a)

$7.00

$4.00

$6.00

Machine Hours needed per unit (b)

2 hours

1 hour

2 Hours

Contribution Margin per unit per machine hour (a/b)

$3.50

$4.00

$3.00

Part b --

WE have calculated Contribution Margin per unit of limiting factor i.e. per machine hour.

The product having highest Contribution Margin per machine hour should be selected to produce by using available machine hours. Since the selected product will provide the highest profitability to the company in scarcity of machine hours.

Product B has highest contribution margin and the company can sale unlimited units. So the company will prepare Product B first by using available machine hours to maximize the profit.

Number of Units of Product B can be made = 3000 Hours / 1 MH needed per unit = 3,000 Units

Part C ---

Analysis showing the total contribution margin

(1) hours divided equally among the products

(2) Hours allocated entirely to the product identified in (b)

Contribution Margin from A (1,000 MHs x $3.50)

$3,500

(1,000 MHs x $3.5)

Contribution Margin from B (1,000 MHs x $4)

$4,000

(1,000 MHs x $4)

$12,000

(3,000 MHs x $4 per MH)

Contribution Margin from C (1,000 MHs x $3)

$3,000

(1,000 MHs x $3)

Total Contribution Margin

$10,500

$12,000

Part D

Product B has highest Contribution Margin per unit per machine hour, hence company should produce Product B by using available machine hours. Thereafter the product having next highest contribution margin should be made.

Total

Hours dedicated to the production of each product

1600

(800 Units x 2 MH)

1000

(1000 Units x 1 MH)

400

(200 Units x 2 MHs)

Units produced for most profitable sales mix

800

1000

200

Contribution Margin per unit

Total contribution margin

$5,600

$4,000

$9,600

$19,200