The constraint at Mcglathery Corporation is time on a particular machine.The company makes three products that use this machine.Data concerning those products appear below: Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?
A)$75.26 per unit
B)$38.94 per unit
C)$11.80 per minute
D)$15.20 per minute

Question

The constraint at Mcglathery Corporation is time on a particular machine.The company makes three products that use this machine.Data concerning those products appear below:  Assume that sufficient time is available on the constrained machine to satisfy demand for all but the least profitable product.Up to how much should the company be willing to pay to acquire more of the constrained resource?
A)$75.26 per unit 
B)$38.94 per unit 
C)$11.80 per minute 
D)$15.20 per minute

Quizplus · Accepted Answer

To determine how much the company should be willing to pay for more of the constrained resource, we need to use the shadow price of the resource. In this case, the constrained resource is time on the machine. The shadow price represents the increase in profit per unit of the constrained resource, so we need to look at the contribution margin per unit for each product that uses the machine.

Product A: (70-42) = $28 contribution margin per unit
Product B: (62-50) = $12 contribution margin per unit
Product C: (50-28) = $22 contribution margin per unit

Since the constraint is on the machine, we need to calculate the contribution margin per minute of machine time for each product.

Product A: $28/2 = $14 contribution margin per minute
Product B: $12/1 = $12 contribution margin per minute
Product C: $22/1 = $22 contribution margin per minute

The highest contribution margin per minute is for Product C, which means the company should be willing to pay up to $22/minute for more machine time. Therefore, the answer is C) $11.80 per minute.

The Constraint at Mcglathery Corporation Is Time on a Particular