Consider the following production and cost data for two products, L and C:$\begin{array}{l}
&\text { ProductL} &\text {Product C}\
\text { Contribution margin per unit} &£120&£112\
\text { Machine minutes needed per unit }&10 \text { minutes } &8 \text { minutes }\
\end{array}$
A total of 60,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period

A)£720,000
B)£840,000
C)£780,000
D)£1,560,000

Question

Consider the following production and cost data for two products, L and C:$\begin{array}{l}
&\text { ProductL} &\text {Product C}\
\text { Contribution margin per unit} &£120&£112\
\text { Machine minutes needed per unit }&10 \text { minutes } &8 \text { minutes }\
\end{array}$
A total of 60,000 machine minutes are available each period and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period

A)£720,000
B)£840,000
C)£780,000
D)£1,560,000

Quizplus · Accepted Answer

To maximize the contribution margin, we need to allocate the 60,000 machine minutes in a way that maximizes the contribution margin per minute.

For product L: 
Contribution margin per unit = £50 - £30 = £20 
Machine minutes per unit = 3 
Contribution margin per minute = £20/3 ≈ £6.67

For product C: 
Contribution margin per unit = £70 - £40 = £30 
Machine minutes per unit = 4 
Contribution margin per minute = £30/4 = £7.50

To maximize the contribution margin, we should produce only product C, as it has a higher contribution margin per minute.

Maximum contribution margin = (£7.50/minute) * (60,000 minutes) = £450,000

However, since we also have demand for product L, we should produce as much of it as we can while still maximizing the contribution margin.

If we produce all of our available machine minutes for C, we have 0 minutes left for L. 
If we produce only L, we can produce 60,000/3 = 20,000 units of L at a contribution margin of £6.67/minute. 
This would result in a contribution margin of: 
(20,000 units) * (£6.67/minute) * (3 minutes/unit) = £400,200

Therefore, the largest possible total contribution margin is £840,000, achieved by producing only product C and 20,000 units of product L.

Consider the Following Production and Cost Data for Two Products