Harley Davidson sells motorcycle X and Y. Motorcycle X sells for $10,000, has va

Question

Harley Davidson sells motorcycle X and Y. Motorcycle X sells for $10,000, has variable cost (labor and material) of $2,000, and requires 10 hours of use of machinery to produce. Motorcycle Y sells for $12,000, has variable costs (labor and material) of $8,000, and requires 2 hours of use of machinery to produce. Harley Davidson has excess capacity of 5,000 hours of use of machinery. Which motorcycle should it produce?

a. Motorcycle X because it has a higher contribution margin of $8,000.

b. Motorcycle Y because it has a higher contribution margin per hour of $2,000.

c. Motorcycle X because it has a higher contribution margin per hour of $4,000.

d. Motorcycle Y because it has a higher contribution margin of $4,000

Explanation / Answer

Answer: B. Motorcycle Y because it has a higher contribution margin per hour of $2,000. For motorcycle X: Contribution margin = sales price – variable costs = 10,000 – 2,000 = 8,000. Contribution margin per hour = 8,000/10 = $800 per hour. For motorcycle Y: Contribution margin = sales price – variable costs = 12,000 – 8,000 = 4,000. Contribution margin per hour = 4,000/2 = $2,000 per hour.

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