2. (20 pts) A tool company sells a plain (price $50, variable cost $35) and a pr

Question

2. (20 pts) A tool company sells a plain (price $50, variable cost $35) and a professional (price $100, variable cost $60) circular saw. It takes one machine-hour to produce a professional and 15 minutes to produce a regular saw. There are 40,000 machine-hours available and demand is more than they can produce. a) Compute contribution margins and contribution margin ratios for each saw. b) Ifall machine hours are used, compute the total contribution margin for plain saws only and professional saws only. Which saw should be produced?

Explanation / Answer

a- Contribution margin of plain= Selling price- Variable cost= $50-$35=$15, Contribution margin ratio=Contribution margin/sales*100= $15/$50*100=30%.

Contribution margin of professional= $100-$60=$40, Contribution margin ratio= $40/$100*100=40%

b-Number of plain shaws produced= 40,000 and total contribution margin= 40,000*$15=$600,000

Number of professional shaws produced= 40,000/15=2667 and total contribution margin= 2667*$40=$106,666.

Professional shaws should be produced because it has higher total contribution margin.

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