Wakeman Products Inc. makes two products-W28H and Z28D. Product W28H's selling price is $27.00 and its unit variable cost is $21.60. Product Z28D's selling price is $170.00 and its unit variable cost is $153.00. The monthly demand is 2,030 units for product W28H and 730 units for Z28D. The constrained resource is a particular machine that is available for 9,500 minutes each month. Each unit of product W28H requires 3 minutes on this machine and each unit of product Z28D requires 10 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) $17.00 per minute
B) $1.70 per minute
C) $1.80 per minute
D) $5.40 per minute

Question

Quizplus · Accepted Answer

To find the maximum amount the company should pay for the constrained resource, we need to calculate the contribution margin per minute of machine time for each product.

For product W28H, the contribution margin per unit is $5.40 ($27 selling price - $21.60 variable cost), and it requires 3 minutes of machine time. Therefore, the contribution margin per minute of machine time for W28H is $1.80 ($5.40/3).

For product Z28D, the contribution margin per unit is $17.00 ($170 selling price - $153 variable cost), and it requires 10 minutes of machine time. Therefore, the contribution margin per minute of machine time for Z28D is $1.70 ($17.00/10).

Since the contribution margin per minute of machine time is higher for product W28H, the company should prioritize using the constrained resource to produce more units of W28H. Therefore, the maximum amount the company should be willing to pay for the constrained resource is equal to the contribution margin per minute of machine time for W28H, which is $1.80.

Therefore, the best choice is B, $1.70 per minute.