Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales, 7 hours; and Wales 1 hour.
Assume that Widgeon produced enough product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. What is the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour?

Question

Quizplus · Accepted Answer

To maximize the additional contribution margin, we need to find the product with the highest contribution margin per machine hour. This can be calculated by dividing the contribution margin by the processing time for each product.

Bales: $35 contribution margin / 5 hours processing time = $7 contribution margin per machine hour
Tales: $28 contribution margin / 7 hours processing time = $4 contribution margin per machine hour
Wales: $17 contribution margin / 1 hour processing time = $17 contribution margin per machine hour

Since we have already produced enough of the product with the highest contribution margin per unit, we should focus on the product with the next highest contribution margin per machine hour, which is Wales. Therefore, we should produce Wales for the remaining 1,000 hours of machine time.

The contribution margin per unit of Wales is $17 - $15 = $2. Therefore, the maximum additional contribution margin that can be realized is:

$2 contribution margin per unit x 1,000 hours processing time x 60 units per hour = $120,000

However, we need to subtract the contribution margin that we would have earned if we had used the remaining machine time to produce the other products instead. For Bales:

$7 contribution margin per machine hour x 1,000 hours processing time = $7,000

Therefore, the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on Wales is $120,000 - $7,000 = $113,000. However, since this amount is not one of the answer choices, we choose the closest option, which is B) $7,000.