Question

Mars Company manufactures and sells three products. Relevant per unit data concerning each product are given below: Product A. B. C Selling price $8. $15. $20 Variable costs and expenses $6. $13. $17 Machine hours to produce 2. 1. 2 Product A B C Selling price $8 $15 $20 Variable costs and expenses $6 $13 $17 Machine hours to produce 2 1 2 Compute the contribution margin per unit of limited resource (machine hours) for each product. (Round contribution margin per unit to 2 decimal places, e.g. 1.25.) Product A. Product B. Product C Contribution margin per unit of limited resource $1. $2. $1.5 Your answer is correct. Product A Product B Product C Contribution margin per unit of limited resource $ 1 $ 2 $ 1.5 Assuming 3,000 additional machine hours are available, which product should be manufactured? Product B What is the total contribution margin if the hours are (1) divided equally amoung the products and (2) if they are allocated entirely to the product identified above. Total contribution margin (1) Divided equally amoung the products $ 1000 (2) Allocated entirely to the product identified above $ 6000 Total contribution margin (1) Divided equally amoung the products $ (2) Allocated entirely to the product identified above $ 6000

Answer 1

SOLUTION

1.

	Product A ($)	Product B ($)	Product C ($)
Contribution margin per unit (a)	2 ($8-$6)	2 ($15-$13)	3 ($20 - $17)
Machine hours required (b)	2	1	2
Contribution margin per unit of limited resource (a) / (b)	1	2	1.5

2. Product B should be manufactured because it results in the highest contribution margin per machine hour.

3A.

	Product A	Product B	Product C
Machine hours 3,000 / 3 (a)	1,000	1,000	1,000
Machine hours per unit (b)	2	1	2
Units produced (a) / (b)	500	1,000	500
Contribution margin per unit	2	2	3
Total contribution margin	1,000	2,000	1,500

3B.

	Product B
Machine hours (a)	3,000
Machine hours per unit (b)	1
Units produced (a) / (b)	3,000
Contribution margin per unit	2
Total contribution margin	6,000