Question

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

	Products
	A				B				C				D
Direct materials	$	15.25			$	11.15			$	11.95			$	11.55
Direct labor		20.35				28.35				34.55				41.35
Variable manufacturing overhead		5.25				3.65				3.55				4.15
Fixed manufacturing overhead		27.45				35.75				27.55				38.15
Unit product cost	$	68.30			$	78.90			$	77.60			$	95.20

Additional data concerning these products are listed below.

	Products
	A				B				C				D
Grinding minutes per unit		3.80				5.30				4.30				3.40
Selling price per unit	$	77.05			$	94.45			$	88.35			$	105.15
Variable selling cost per unit	$	3.15			$	2.15			$	4.25			$	2.55
Monthly demand in units		4,380				4,380				3,380				2,380

The grinding machines are the constraint in the production facility. A total of 55,500 minutes is available per month on these machines.
Direct labor is a variable cost in this company.

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

Answer 1

TABLE SHOWING CALCULATION OF CONTRIBUTION

	A($)	B($)	C($)	D($)
unit product cost	68.3	78.9	77.6	95.2
- fixed cost	27.45	35.73	27.55	38.15
+ variable selling cost	3.15	2.15	4.25	2.55
total variable cost	44	45.32	54.3	59.6
sales price	77.05	94.45	88.35	105.15
- variable cost	44	45.32	54.3	59.6
contribution	33.05	49.13	34.05	45.55
key factor grinding minutes pu	3.8	5.3	4.3	3.4
contribution per key factor	8.697368	9.269811	7.918605	13.39706

As grinding time is a constraint and key factor, Product D has a maximum contribution per key factor. Therefore, D is making most profitable use of grinding machines.