Question

Bubble Company produces a variety of bottles from recycled plastic. The company has one particular machine on which it can produce either of two types of water bottles, 1-liter bottles or 1/2-liter bottles. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Bubble can sell all output at current prices. One unit of the 1/2-liter product requires one hour of machine time per unit of output, and one unit of the 1-liter bottle requires two hours of machine time. Each “unit” is a box that contains 150 bottles.

Following are the costs per unit for the bottles:

	Per Unit (150 bottles in a unit)
	1/2-Liter Bottles			1-Liter Bottles
Selling price	$	31		$	45
Costs
Materials	$	6		$	9
Labor		1			1
Machine maintenance and depreciationa		6			12
Allocated portion of fixed factory costsb		5			5
Total cost per unit	$	18		$	27
Gross margin per unit	$	13		$	18

^a This item is a variable cost because it is based on machine usage.

^b This item is a fixed cost because it is unaffected by the usage of the machine.

All other costs are the same whether Bubble produces 1-liter bottles, 1/2-liter bottles, or both, so you may ignore them.

Required:

a-1. Calculate the contribution margin per hour of machine time for the two products. (Consider Depreciation as a variable cost.) (Round your answers to 2 decimal places.)

a-2. Should Bubble produce 1-liter bottles, 1/2-liter bottles, or both?

	1-liter bottles
	1/2-liter bottles
	both

Answer 1

A1		0.5 Litre Bottle	1.0 Litre Bottle
	Selling Price	31.00	45.00
	Less: Variable Costs:
	Materials	6.00	9.00
	Labor	1.00	1.00
	Machine Maintaince & Depreciation	6.00	12.00
	Contribution Margin PU	18.00	23.00
	Machine Hour PU	1	2
	Contribution Margin Per MH	18.00	11.50
A2	Since 0.5 Litre has high Contribution Margin per MH; Hence Company should focus on it to maximize profits
	Answer is 1/2 Lt Bottles