All Terrain Tires manufactures three different off-road ATV tires: Model A, Model B, and Model C. Plenty of market demand exists for all models. The table below reports the prices and costs per unit of each product:
Assuming that machine hours are limited (i.e., this is the constrained resource), at what price does Model A become the most profitable model to produce?
A) Any price above $23
B) Any price above $35
C) Any price above $47
D) Any price above $55
E) None of the above

Question

All Terrain Tires manufactures three different off-road ATV tires: Model A, Model B, and Model C. Plenty of market demand exists for all models. The table below reports the prices and costs per unit of each product:
 Assuming that machine hours are limited (i.e., this is the constrained resource), at what price does Model A become the most profitable model to produce?
A) Any price above $23 
B) Any price above $35 
C) Any price above $47 
D) Any price above $55 
E) None of the above

Quizplus · Accepted Answer

Contribution Margin per Machine hour:
 11ee472f_eee1_947b_a6cd_5778d7b2495d_TBCB1009_00 Model A must generate more than $12 contribution margin per machine hour (Model B's contribution margin). Because Model A requires just 1 machine hour, any price above $35 ($5 direct materials + $15 direct labor + $3 variable overhead + $12 contribution margin = $35) would generate more than $12 contribution margin per machine hour.

All Terrain Tires Manufactures Three Different Off-Road ATV Tires: Model