Question

A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.

Small         Medium         Large

        Unit selling price                                                     $450               $620           $1,240

        Unit costs:

                Variable manufacturing (240)              (280)              (530)

                Fixed manufacturing (80)              (140)              (250)

                Fixed selling and administrative (110) (125) (130)

        Unit profit $20                 $75               $330

        Demand in units                                                        110                 140                 110

        Machine-hours per unit                                             40                    70                 142

The maximum machine-hours available are 6,500 per week.

a. What is the contribution margin for each of the three different size appliances?

b. What is the contribution margin per machine-hour for each of the three different size appliances?

c. If there is excess capacity, which size is the most profitable to produce?

d. If there is NOT excess capacity, which size is the most profitable to produce?

Answer 1

a.

	Small	Medium	Large
Selling price per unit	450	620	1,240
Variable manufacturing cost per unit	-240	-280	-530
Contribution Margin per unit	210	340	710

b.

	Small	Medium	Large
Selling price per unit	450	620	1,240
Variable manufacturing cost per unit	-240	-280	-530
Contribution Margin per unit	210	340	710
Machine hours per unit	40	70	142
Contribution Margin per machine hour(Contribution Margin per unit/Machine hours per unit)	5.25	4.86	5.00

c.

When there is excess capacity, Large size is most profitable to produce since, it has higher contribution margin per unit.

d.

When there is not excess capacity, Small size is most profitable to produce , since it has highest contribution margin per machine hour.