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 labor 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)$975, 000
C)$910, 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 labor 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)$975, 000 
C)$910, 000 
D)$1, 820, 000

Quizplus · Accepted Answer

To maximize the contribution margin, the company should produce the product with the highest contribution margin per machine set-up until they reach 65,000 set-ups.

Calculating the contribution margin per machine set-up for each product:

L: ($280 - $245) = $35 
C: ($230 - $175) = $55

Therefore, the company should produce C until they have completed 65,000 set-ups.

Maximum possible contribution margin:

65,000 set-ups x $55 contribution margin per set-up = $3,575,000

However, the company can only produce up to 50,000 units of C each period due to capacity constraints (65,000 machine set-ups / 1.3 set-ups per unit). Therefore, the maximum possible contribution margin is:

50,000 units x $55 contribution margin per unit = $2,750,000

This is only achievable if the company produces 50,000 units of C and 0 units of L. Therefore, the best choice is B.

Consider the Following Production and Cost Data for Two Products