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This is the total contribution margin Lazar can earn if it produces 500,000 Crates, which it could do in 1,000,000 machine hours available. However, this is not the maximum amount of contribution margin Lazar can generate during the renovation period.
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Since we have a constrained resource – machine hours – the first thing to do is calculate the contribution margin of each product per machine hour, in order to determine which product should be given priority in manufacturing. Crates Trunks Selling price $20 $30 Variable costs (DM, DL, VOH, VS) 17 22 Contribution margin per unit $ 3 $ 8 Machine hours required per unit 2 4 Contribution margin per machine hour (CM per unit / MH per unit) $1.50 $2.00 Priority in manufacturing should be given to the Trunks, since they have the higher contribution margin per machine hour required to manufacture them. The Trunks require 4 machine hours each. If 1,000,000 machine hours are available, then the maximum number of Trunks that can be manufactured is 1,000,000 ÷ 4, or 250,000. No Crates will be able to be manufactured. The unit contribution margin for Trunks is $8. If 250,000 Trunks are manufactured and sold, the total contribution margin will be $8 × 250,000, or $2,000,000. This is the maximum amount of contribution margin Lazar can generate during the renovation period.
This is not the correct answer. Please see the correct answer for a complete explanation. We have been unable to determine how to calculate this incorrect answer choice. If you have calculated it, please let us know how you did it so we can create a full explanation of why this answer choice is incorrect. Please send us an email at support@hockinternational.com. Include the full Question ID number and the actual incorrect answer choice -- not its letter, because that can change with every study session created. The Question ID number appears in the upper right corner of the ExamSuccess screen. Thank you in advance for helping us to make your HOCK study materials better.