Wright Enterprises, which produces various goods, has limited processing hours a

Question

Wright Enterprises, which produces various goods, has limited processing hours at its manufacturing plant. The following data apply to product no. 607:

Sales price per unit: $10.50
Variable cost per unit: $6.30
Process time per unit:5.00 hours

Management is now studying whether to devote the firm's limited hours to product no. 607 or to other products. What key dollar amount should management focus on when determining no. 607's "value" to the firm and deciding the best course of action to follow considering the limited processing hours at its manufacturing plant?

$10.50.

$6.30.

$4.20.

$2.10.

$0.84.

Explanation / Answer

Solution:

Sales price per unit of Product 607 = $10.50

Variable Cost per unit = $6.30

Contribution per unit = $10.50 - $6.30 = $4.20 per unit

Process time per unit = 5 hours

As hours are constraint for the firm and management to focus whether this time is to devote on product no 607 or other product. In such a case, in order to maximize the profitabiliy contribution per unit of limited resource to be calculated. The product which give maximum contribution per limited resource, company should focus production of those products.

In this case contribution per hour of product 607 = 4.20 / 5 = $0.84 per hour.

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