Consider the following production and cost data for two products,L and C: The company can only perform 65,000 machine set-ups each period due to limited skilled labour and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?
A) $845,000.
B) $910,000.
C) $975,000.
D) $1,820,000.

Question

Consider the following production and cost data for two products,L and C:  The company can only perform 65,000 machine set-ups each period due to limited skilled labour and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?
A) $845,000. 
B) $910,000. 
C) $975,000. 
D) $1,820,000.

Quizplus · Accepted Answer

To maximize the contribution margin, we need to produce the products with the highest contribution margin per machine setup.

For product L, the contribution margin per unit is $10 - $5 = $5. For product C, the contribution margin per unit is $12 - $7 = $5.

However, product C requires two machine setups per unit, while product L only requires one. Therefore, the contribution margin per machine setup for product L is $5, while for product C it is $5/2 = $2.5.

To maximize the total contribution margin, we should produce as much of product L as possible until we reach the limit of 65,000 machine setups.

The maximum number of units of product L that we can produce is 65,000 machine setups / 1 machine setup per unit = 65,000 units.

The total contribution margin from product L would be $5 × 65,000 units = $325,000.

Therefore, the largest possible total contribution margin that can be realized each period is $325,000 for product L.

Answer Choice: C

Consider the Following Production and Cost Data for Two Products,L