Question

Consider the following production and cost data for two products, X and Y:

Product X ProductY
Contribution margin per unit............................. $24 $18
Machine-hours needed per unit........................ 3 hours 2 hours

The company has 15,000 machine hours 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. $120,000
b. $125,000
c. $135,000
d. $150,000

Answer 1

Concepts and reason

Marginal or variable costing: The method of ascertaining the marginal cost by considering the number of units produced (output), types of costs expended and the effect on profit.

Variable Costing: Variable costing is one of the costing methods that allocate only variable costs to the product. The change in level of output will cause change in variable costs. This is also known as direct costing.

Machine Hours: Machine hours are the number of hours the machine is operated during the production run. This is used as a measure for allocating the overheads and other costs.

It is calculated by multiplying the number of machines with the number of hours of operation of each machine.

Fundamentals

Contribution margin: The amount of sale price over and above the variable cost is the contribution margin. It is calculated per unit by using the following formula:

Limiting Factor: It refers to the constraints in availability of production and supply of resources such as machine hours, labor and material that prevents the business from maximizing its sales.

Determine the contribution per machine hour for each product.

Compute the number of units considering the machine hours needed per unit of Product Y as follows:

The company has 15,000 machine hours available each period. Number of units for Product Y is shown below.

Compute the Contribution margin that can be realized as follows:

Working notes:

Ans:

Largest possible contribution margin that can be realized is $135,000.