Question

Cullumber Innovations, Inc. produces exercise and fitness gear. Two of its newer products require a finishing process that can only be completed on machines that were recently purchased for this purpose. The machines have a maximum capacity of 6,000 machine hours, and no other products that the company makes use these machines.

Sarah Jacob, the company’s operations manager, is preparing the production schedule for the coming month and can’t seem to find enough machine time to produce enough units to meet the customer demand that the marketing department has included in the sales budget.

Michael Stoner, the company’s controller, has gathered the following information about the two products:

		Dumbbell Rack				Weight Bench
Selling price per unit			$50				$60
Direct materials			18				15
Direct labor			4				8
Variable overhead			3				6
Fixed overhead			5				10
Profit per unit			$20				$21
Unit sales demand			4,000				7,000
Machine hours per unit			0.50				0.80

After hearing about Sarah’s recommendation to increase the weight bench price to $70, Scott Wilson, the sales manager, suggested that the company raise the price of the dumbbell rack instead. He believes that if the price is increased to $57, demand will fall to 1,840 units. What total contribution margin will Cullumber earn?

Total contribution margin

$

Answer 1

Contribution margin per machine hour:

	Dumbbell rack ($)	Weight bench ($)
Selling price	50	60
Direct material	18	15
Direct labor	4	8
Variable overhead	3	6
Contribution margin per unit	25	31
Machine hours per unit	0.50	0.80
Contribution margin per machine hour	50	$38.75

Total Machine hours for weight bench = 1840 x 0.80 = 1472

total machine hours used for dumbbell rack = 6000 - 1472 = 4528

therefore,

total contribution margin = (4528 x 50) + (1472 x 38.25)

= $282704