Question

Bothell Inc. makes two products A and B that use compound W, the current constrained resource:

	Product A			Product B
Contribution margin per unit	$	60			$	56
Pounds of compound W per unit		5				4

A total of 30,000 pounds of compound W are available each period and the demand for each product is infinitely large. What is the maximum contribution margin that Bothell can generate each period?

Multiple Choice

• $390,000

• $780,000

• $420,000

• $360,000

Answer 1

The correct answer is

$ 420000

Calculation

Contribution margin Per pound of W for product A = contribution margin per unit / pounds of W per unit

= 60/5

= $ 12 per pound

Contribution margin Per pound of W for product B = contribution margin per unit / pounds of W per unit

= 56/4

= $ 14  per pound

Since the product B has higher contribution margin per limiting factor, so product B will be produced

Total contribution margin from manufacturing Product B

= No. of units of Product B based on limiting factor * contribution margin per unit

= ( 30000/4) * 56

= 7500*56

= $ 420000

Thus the correct answer is $ 420000