Katy Co. manufactures three sizes of product lines: Model A, Model B, and Model

Question

Katy Co. manufactures three sizes of product lines: Model A, Model B, and Model C. Product information for each product line is provided below.

The maximum machine-hours available are 12,000 per week.

Required:

a. For each model, compute the contribution margin per unit.

b. For each model, compute the contribution margin per machine-hour.

c. If there is excess capacity, which model is the most profitable to produce? Why?

d. If there is a machine breakdown, which model is the most profitable to produce? Why?

e. How can Victoria encourage her sales people to promote the more profitable model?

Model A Model B Model C Unit selling price 500 800 1000 Unit costs    Variable manufacturing 200 350 450    Fixed manufacturing 150 200 225    Variable selling and administrative 50 100 125 Unit profit 100 150 200 Demand in units 200 150 100 Machine hours per unit 20 40 50

Explanation / Answer

Requirement c:

If there is excess capacity, Model C is the most profitable to produce since it gives the maximum contribution margin.

Requirement d:

If there is a machine breakdown, Model A is the most profitable to produce since it gives the maximum contribution margin per machine hour.

Requirement e:

The most profitable prodect mix:

Victoria should make her sales people to understand the most profitable product mix to promote the more profitable model.

Requirement a: Computation of Contribution margin per unit: Particulars Model A Model B Model C A Unit Selling Price 500 800 1000 B Unit Variable Cost Manufacturing Cost 200 350 450 Selling & Administrativve Cost 50 100 125 250 450 575 C Unit Contribution Margin (A-B) 250 350 425 Requirement b: Computation of Contribution Margin per machine hour: Particulars Model A Model B Model C A Unit Contribution Margin 250 350 425 B Machine Houre per unit 20 40 50 C Contribution Margin per machine hour (A/B) 12.5 8.75 8.5

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