Question

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

	Product
	C			D			E
Selling price	$	90		$	70		$	100
Variable costs	$	65		$	55		$	70
Fixed costs	$	10		$	7		$	7
Tapping 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 tapping machine is the constraint, with only 2,600 minutes of tapping machine time available this week.

Required:

a. Given the tapping machine constraint, which product should be emphasized?

a.	Product C
b.	Product D
c.	Product E

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 tapping machine time?

Answer 1

a.  

	C	D	E
Selling price	$90	70	100
Less: Variable cost	65	55	70
Contribution margin	$25	15	30
Tapping machine time	10	5	5
Contribution margin per minute	$2.5	3	6
Order	3	2	1

Product E should be emphasized because it has more contribution margin per minute than the C&D.

b. The company should be willing to pay for additional hours of tapping machine time on the first product E = 6*100 = 300 per hour