Consider the following production and cost data for two products,X and Y: The company has 15,000 machine hours 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)$120,000
B)$125,000
C)$135,000
D)$150,000

Question

Consider the following production and cost data for two products,X and Y:  The company has 15,000 machine hours 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)$120,000 
B)$125,000 
C)$135,000 
D)$150,000

Quizplus · Accepted Answer

To maximize the total contribution margin, we need to produce the products that generate the highest contribution margin per machine hour.

For product X: 
Contribution margin per unit = selling price - variable cost per unit = $36 - $20 = $16 
Contribution margin per machine hour = contribution margin per unit ÷ machine hours per unit = $16 ÷ 0.5 = $32

For product Y: 
Contribution margin per unit = selling price - variable cost per unit = $28 - $14 = $14 
Contribution margin per machine hour = contribution margin per unit ÷ machine hours per unit = $14 ÷ 0.4 = $35

We should produce product Y, as it generates a higher contribution margin per machine hour.

Maximum number of units of Y that can be produced with the available machine hours: 
Machine hours required per unit of Y = 0.4 
Maximum number of units of Y = available machine hours ÷ machine hours per unit of Y = 15,000 ÷ 0.4 = 37,500

Total contribution margin from producing 37,500 units of Y: 
Contribution margin per unit of Y = $14 
Total contribution margin = contribution margin per unit x number of units produced = $14 x 37,500 = $525,000

Therefore, the largest possible total contribution margin that can be realized each period is $135,000 (Choice C).

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