Question

CyclePath Company produces two different products that have the following price and cost characteristics:

	Bicycle	Tricycle
Selling price per unit	100	400
Variable cost per unit	40	240

Management believes that pushing sales of the Bicycle product would maximize company profits because of the high contribution margin per unit for this product. However, only 50,000 labor hours are available each year, and the Bicycle product requires 4 labor hours per unit while the Tricycle model requires 2 labor hours per unit. The company sells everything it produces.

Required:

a. Calculate the contribution margin per unit of constrained resource for each model.

b. Which model would CyclePath prefer to sell to maximize overall company profit? Explain.

Answer 1

			BICYCLE	TRICYCLE
	selling price per unit		100	400
	variable cost		40	240
	contribution margin per unit		60	160
	no. of labor units for one unit of finished product		4	2
1-	contribution margin per unit of constrained resource for each model.	contribution margin per unit/no of labor units required for 1 finished unit	15	80
2-	total profit for each model	(no of hours available/hours required per unit)*contribution margin per unit of constrained resource	187500	2000000
			(50000/4)*15	(50000/2)*80
	CyclePath prefer to sell Tricycle to maximize overall company profit