Alamo Corporation processes all of its products through a lathe machine. The lathe is only available for 60 hours per week and is the constraint for all of the products. Data regarding Alamo Corporation's three products follows: In what order should Alamo Corporation emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.)
A)Product B, Product A, Product C
B)Product A, Product C, Product B
C)Product A, Product B, Product C
D)Product B, Product C, Product A

Question

Alamo Corporation processes all of its products through a lathe machine. The lathe is only available for 60 hours per week and is the constraint for all of the products. Data regarding Alamo Corporation's three products follows:  In what order should Alamo Corporation emphasize its products to maximize its contribution margin? (Rank the products in order from most profitable to least profitable.)
A)Product B, Product A, Product C 
B)Product A, Product C, Product B 
C)Product A, Product B, Product C 
D)Product B, Product C, Product A

Quizplus · Accepted Answer

To determine the optimal product mix, Alamo Corporation needs to calculate the contribution margin per machine hour for each product.

Product A: 
Contribution margin = $250
Machine hours per unit = 2
Contribution margin per machine hour = $125 (=$250/2)

Product B: 
Contribution margin = $400 
Machine hours per unit = 3 
Contribution margin per machine hour = $133.33 (=$400/3)

Product C: 
Contribution margin = $300 
Machine hours per unit = 4 
Contribution margin per machine hour = $75 (=$300/4)

Based on the contribution margin per machine hour, Product B is the most profitable with $133.33 per hour, followed by Product A with $125 per hour, and then Product C with $75 per hour. Therefore, Alamo Corporation should emphasize Product A, then Product B, and finally Product C to maximize contribution margin with the limited 60 hours available on the lathe machine.

Alamo Corporation Processes All of Its Products Through a Lathe