Question

Wanda Company produces three products with the following information:

	Product
	Good	Better	Best
Selling price per unit	$17	$19	$26
Variable cost per unit	$8	$10	$12
Machine-hours per unit (MH/unit)	2	3	4

The company has a limit of 14,300 machine-hours available per month and a monthly fixed cost of $21,000. The demand for each of the products is 2,500 units per month.

The company’s goal is to maximize its profitability.

Suppose the company can rent a machine that will provide an additional 1,060 machine-hours per month.

(Q): What is the maximum monthly rent the company should be willing to pay for this machine (assuming they’ve made optimal use of their own machine)?

(A): $   

Answer 1

	Good	Better	Best
Selling price per unit	17	19	26
variable cost per unit	8	10	12
Contribution margin per unit	9	9	14
machine hour per unit	2	3	4
Contribution margin per machine hour	4.50	3	3.50
Ranking	1	3	2

Total hours required for production of all product = 2500*(2+3+4) = 22500 hours

Hours required for Good = 2500*2 = 5000

Balance hours = 14300-5000 = 9300 hours

Possible units of Best = 9300/4 = 2325

More units of best can be produced from rent f machine = 2500-2325 = 175 units

Hours required for 175 units = 175*4 = 700 hours

Balance hours for production of better = 1060 - 700 = 360 hours

Maximum monthly rent = 700 hours * $3.50 + 360 hours * $3 = $3,530