Consider the following production and cost data for two products, L and C: $$\begin{array} { | l | l | l | }
\hline & \text { Product } L & \text { Product } C \
\hline \text { Contribution margin per unit } & \$ 130 & \$ 120 \
\hline \text { Machine set-ups needed per unit } & 10 \text { set-ups } & 8 \text { set-ups } \
\hline
\end{array}$$ The company can only perform 65,000 machine set-ups each period due to limited skilled labour and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?
A)$975,000.
B)$910,000.
C)$1,820,000.
D)$845,000.

Question

Consider the following production and cost data for two products, L and C: $$\begin{array} { | l | l | l | } 
\hline & \text { Product } L & \text { Product } C \
\hline \text { Contribution margin per unit } & \$ 130 & \$ 120 \
\hline \text { Machine set-ups needed per unit } & 10 \text { set-ups } & 8 \text { set-ups } \
\hline
\end{array}$$ The company can only perform 65,000 machine set-ups each period due to limited skilled labour and there is unlimited demand for each product. What is the largest possible total contribution margin that can be realized each period?
A)$975,000.
B)$910,000.
C)$1,820,000.
D)$845,000.

Quizplus · Accepted Answer

The largest possible total contribution margin is achieved by producing the product with the highest contribution margin per unit, up to the limit of the available machine set-ups. In this case, Product L has a higher contribution margin per unit than Product C, so the company should produce as many units of Product L as possible, up to the limit of 65,000 machine set-ups. The total contribution margin for Product L is:Total contribution margin for Product L = Contribution margin per unit * Number of units produced= $130 * 65,000= $8,450,000Since there are no units of Product C produced, the total contribution margin for Product C is $0.Therefore, the largest possible total contribution margin is $8,450,000.

Consider the Following Production and Cost Data for Two Products