Question

Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and Wales 1 hour.

Which product has the highest contribution margin per machine hour?

a. Bales
b. Tales
c. Bales and Tales have the same
d. Wales

Answer 1

Option D

Wales

Step-by-step explanation:

Whenever a company is faced with a limiting factor i.e a resource in short supply, the company should allocate the resource to the product with the highest contribution per unit of the scare resource

The contribution per unit = selling price - unit variable cost

Bales- 55- 20= 35 per unit

Tales- 78- 50 = 28 per unit

Wales - 32- 15 = 17 per unit

Contribution per hour = contribution per unit/machine hour required

Product Cont/unit machine hr /unit cont/hr Ranking

Bales 35 5 7 2nd

Tales 28 7 4 3rd

Wales 17 1 17 1st

Note that the contribution per machine is arrived as contribution per unit divided machine hours required per product.