Question

Bruce Corporation makes four products in a single facility. These products have the following unit product costs:

	Products
	A		B		C		D
Direct materials	$	19.90	$	15.20	$	20.80	$	23.20
Direct labor		12.20		8.70		10.50		7.40
Variable manufacturing overhead	$	1.60	$	2.10	$	2.00	$	2.10
Fixed manufacturing overhead		10.80		11.90		8.80		10.70
Unit product cost		44.50		37.90		42.10		43.40

Additional data concerning these products are listed below.

	Products
	A		B		C		D
Grinding minutes per unit		1.20		0.70		0.60		0.60
Selling price per unit	$	59.30	$	51.70	$	59.50	$	55.60
Variable selling cost per unit	$	3.60	$	1.50	$	2.20	$	3.60
Monthly demand in units		4,000		2,000		4,000		2,000

The grinding machines are potentially the constraint in the production facility. A total of 9,800 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Which product makes the LEAST profitable use of the grinding machines?

Answer 1

Solution:

Particulars	Amount ($)	Amount ($)	Amount ($)	Amount ($)
Products	A	B	C	D
Selling Price per unit	59.30	51.70	59.50	55.60
Less: Variable Cost
Direct materials	(19.90)	(15.20)	(20.80)	(23.20)
Direct labor	(12.20)	(8.70)	(10.50)	(7.40)
Variable manufacturing overhead	(1.60)	(2.10)	(2.00)	(2.10)
Variable selling cost per unit	(3.60)	(1.50)	(2.20)	(3.60)
Contribution per unit	$ 22	$ 24.2	$ 24	$ 19.3
Grinding minutes per unit	1.20	0.70	0.60	0.60
Contribution per grinding minutes =( Contribution per unit / Grinding minutes per unit )	= $ 22 / 1.20 = $ 18.33	= $ 24.2 / 0.70 = $ 34.57	= $ 24 /0.60 = $ 40	= $ 19.3 / 0.60 = $ 32.16
Ranks in terms of profitability	4th	2nd	1st	3rd

On the basis of above ranking “Product A makes the LEAST profitable use of the grinding machines”.