Question

The Hamilton Company manufactures two products: X and Y. Contribution margin per unit is determined as follows:

Product X Product Y

Revenue........................................... $130................. $80

Variable Costs................................... .$70................. $38

Contribution margin............................ $60................. $42

Total demand for X is 16,000 units and for Y is 8,000 units. Machine hours are a scarce resource. 42,000 machine hours are available during the year. Product X requires 6 machine hours per unit, while Product Y requires 3 machine hours per unit. How many units of X and Y should Hamilton Company produce?

Answer #1

Contribution margin per machine hour

Product X = 60/6 = $10

Product Y = 42/3 = $14

As the machine hour resource is scarce therefore we will use contribution margin per machine hour for the decision making purpose.

In the above calculation contribution margin per machine hour is more of Product Y therefore total demand of Y will be fulfilled and then the remaining machine hours will be used in product X.

Total units to be produced

Product Y = 8,000 units

Remaining hours = 42,000 - (8,000*3) = 18,000 hours

Product X = 18,000/6

= 3,000 units

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