Question

Product A has a contribution margin of $180 per unit and requires three hours of machine time. Product B requires four hours of machine time and provides $240 of contribution margin per unit.

Required:

If the capacity of machine time is limited to 1,000 hours and only one product can be produced, what is the maximum amount of contribution that could be generated?

Answer 1

Calculation of maximum amount of contribution =

If product A is produced=

Capacity of Machine time = 1000 hours

Time taken to produce 1 unit of product A = 3 hours

Number of units of product A produced =

= 1000 hours / 3 hours

= 333.33 units

= If round off, then 333 units

Contribution per unit of product A = $180

Total contribution of Product A = 333 units × $180

= $59940

If product B is produced=

Capacity of Machine time = 1000 hours

Time taken to produce 1 unit of product B = 4 hours

Number of units of product B produced =

= 1000 hours / 4 hours

= 250 units

Contribution per unit of product B = $240

Total contribution of Product B = 250 units × $240

= $ 60000

Therefore, the maximum amount of contribution that could be generated is $60000 by producing 250 units of Product B.