Question

Consider the following production and cost data for two products, L and C:

Contribution margin per unit:

Product L: $120

Product C: $112

Machine minutes needed per unit:

Product L: 10 minutes

Product C: 8 minutes

A total of 60,000 machine minutes are available each period and there is unlimited demand for each product.

What is the largest possible total contribution margin that can be realized each period?

a. $720,000

b. $840,000

c. $780,000

d. $1,560,000

Answer 1

The largest possible total contribution margin each period is realized by allocating all the available machine minutes to produce Product C, yielding a contribution margin of $840,000.

Step-by-step explanation:

Contribution Margin Optimization:

To determine the largest possible total contribution margin that can be realized each period, we need to calculate the contribution margin per minute for each product and then allocate the available machine minutes to maximize the total contribution margin. For Product L, the contribution margin per minute is $120 / 10 minutes = $12 per minute. For Product C, it is $112 / 8 minutes = $14 per minute. Since Product C has a higher contribution margin per minute, we should allocate all available machine minutes to it first.

To use all available 60,000 machine minutes on Product C, we would produce 60,000 minutes / 8 minutes per unit = 7,500 units. The contribution margin for Product C would then be 7,500 units * $112 = $840,000. This is the largest possible total contribution margin that can be realized each period given the constraints.