Up to how much should the company be willing to pay for one additional hour of milling machine time if the company has made the best use of the existing milling machine capacity? (Round off to the nearest whole cent. )
A) $0.00.
B) $4.55.
C) $11.25.
D) $15.50.

Question

Quizplus · Accepted Answer

The opportunity cost of using one hour of milling machine time is the contribution margin per hour that could have been earned from producing an alternative product. From the given information, the contribution margin per hour is $25 - $10 - $4 = $11. Therefore, the company should be willing to pay up to $11 per additional hour of milling machine time. However, since the company has already made the best use of its existing milling capacity, they would not be willing to pay the full opportunity cost. Therefore, the maximum amount the company should be willing to pay for one additional hour of milling machine time is $11 - $6 = $5. Since $5 is less than $4.55, the company should not pay anything for one additional hour of milling machine time. Therefore, the correct answer is B.

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