In this problem it is necessary to optimize the contribution margin of a scarce resource. The scarce resource in this problem is machine hours. XY-7 BD-4 Sales price $4.00 $3.00 Variable costs $3.00 $2.50 Contribution margin $1.00 $ .50 Fixed manufacturing costs are applied based on machine hours. Therefore, the machine hours required to produce one unit of product XY-7 are .75 ($ .75 ÷ $1.00) and .20 for product BD-4 ($.20 ÷ $1.00). This means that the CM per machine hour for XY-7 is $1.33 ($1.00 ÷ .75), and the CM per machine hour for BD-4 is $2.50 ($.50 ÷ .20). Since BD-4 has the highest contribution margin per machine hours used and since the potential increase in sales units resulting from the advertising is far in excess of this production capacity, we know that all that Moorhead can produce can be sold. Therefore, only BD-4 should be produced. Since 100,000 machine hours are available and each unit of BD-4 requires .20 hour to produce, the company can produce 500,000 units (100,000 × .20). The total contribution margin will be be $250,000 ($.50 UCM × 500,000 units sold). It is always best to optimize the contribution margin of the scarce resource. See correct answer. See correct answer. See correct answer.
|