Question

Four products are made in a single factory by General Electric Corporation. These products have the following unit product costs:

	Products
	A	B	C	D
Direct materials	$14.00	$9.90	$10.70	$10.30
Direct labor	19.10	27.10	33.30	40.10
Variable manufacturing overhead	4.00	2.40	2.30	2.90
Fixed manufacturing overhead	26.20	34.50	26.30	36.90
Unit product cost	$63.30	$73.90	$72.60	$90.20

Additional data concerning these products are listed below.

	Products
	A	B	C	D
Grinding minutes per unit	3.50	5.00	4.00	3.10
Selling price per unit	$75.80	$93.20	$87.10	$103.90
Variable selling cost per unit	$ 1.90	$ .90	$ 3.00	$ 1.30
Monthly demand in units	3,700.00	3,700.00	2,700.00	2,900.00

The grinding machines are potentially the constraint in the production facility. A total of 53,400 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round your intermediate calculations and final answer to 2 decimal places.)

a. $15.90

b. $4.73

c. $9.45

d. $12.70

Answer 1

c.$9.45

first let us know the amount of contribution per grinding minute:

	A	B	C	D
selling price per unit	75.80	93.20	87.10	103.90
less: variable costs
direct materials	(14.00)	(9.90)	(10.70)	(10.30)
direct labour	(19.10)	(27.10)	(33.30)	(40.10)
variable manufacturing overhead	(4.00)	(2.40)	(2.30)	(2.90)
variable selling price per unit	(1.90)	(0.90)	(3.00)	(1.30)
contribution per unit	36.80	52.90	37.80	49.30
grinding minutes per unit	3.50	5.00	4.00	3.10
contribution per grinding minute (conttribution per unit/grinding minutes per unit)	10.51	10.58	9.45	15.90
ranking	3	2	4	1

if the company has made the best use of existing grinding machine capacity, it should be will to pay $9.45 per grinding minute, since it is the minimum contribution it is earning per grinding minute