Question

Redner, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

	Product
	J			K			L
Selling price	$	75		$	55		$	85
Variable costs	$	40		$	30		$	45
Fixed costs		15			8			12
Granding machine time (minutes)		10			5			5

Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint, with only 2,500 minutes of grinding machine time available this week.

Required:
a-1.	Calculate the contribution margin per minute for all three products. (Round your answers to 2 decimal places. Omit the "$" sign in your response.)

	J	K	L
Contribution margin per minute	$	$	$

a-2.	Given the grinding machine constraint, which product should be emphasized?
	Product J Product K Product L

b.	Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of grinding machine time? (Omit the "$" sign in your response.)

Maximum amount

$  per hour

Answer 1

Ans-a-1-

	J	K	L
Selling price	75	55	85
Less: variable cost	40	30	45
Contribution per unit	35	25	40
Granding machine time(minutes)	10	5	5
Contribution margin per minute	3.5	5	8

a-2

Since the demand of all J,K,L exceeds the production capacity of the company, and grinding machine is the constraint, we should emphasise on product which can yield the highest contribution per minute. So, based on the calculation above, we should emphasize on the production of Product L as it yield $8 per minute, which is the highest among three products.

b

In one hour, the contribution earned for producing solely product L is 8 x 60 = $480.

Thus, the company will be willing to pay AT MOST $300 for additional hour of grinding available.