Near Corporation's two products have the following characteristics: The constrained resource is a particular machine that is available for 10, 400 minutes each month.Each unit of product L06K requires 16 minutes on this machine and each unit of product G57S requires 5 minutes on this machine. Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?
A)$52.80 per minute
B)$25.00 per minute
C)$3.30 per minute
D)$5.00 per minute

Question

Near Corporation's two products have the following characteristics:  The constrained resource is a particular machine that is available for 10, 400 minutes each month.Each unit of product L06K requires 16 minutes on this machine and each unit of product G57S requires 5 minutes on this machine. Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?
A)$52.80 per minute 
B)$25.00 per minute 
C)$3.30 per minute 
D)$5.00 per minute

Quizplus · Accepted Answer

To determine the maximum amount the company should be willing to pay, we need to calculate the contribution margin per unit of the products and divide it by the time required on the constrained machine.

Contribution Margin per L06K unit is $40 - $25 = $15
Contribution Margin per G57S unit is $60 - $35 = $25

Time required for L06K unit is 16 minutes
Time required for G57S unit is 5 minutes

Therefore, the contribution margin per minute of the constrained machine for L06K is $15/16 = $0.9375
And the contribution margin per minute of the constrained machine for G57S is $25/5 = $5

The company should be willing to pay up to the lower of the two values, which is $0.9375 per minute. Therefore, the best choice is C.

Near Corporation's Two Products Have the Following Characteristics: the Constrained