Pete's Sports Products makes caps and uniforms.It can sell all of either product it can make.The relevant data for these two products follows:

Total fixed overhead is $240,000.The company has 100,000 machine hours available for production.The company should select which product to maximize operating profits?
A)Uniforms,because its contribution margin per unit is $16.
B)Uniforms,because its contribution margin per hour is $8.
C)Caps,because its contribution margin per hour is $16
D)Caps,because its contribution margin per unit is $8.

Question

Pete's Sports Products makes caps and uniforms.It can sell all of either product it can make.The relevant data for these two products follows:

Total fixed overhead is $240,000.The company has 100,000 machine hours available for production.The company should select which product to maximize operating profits?
A)Uniforms,because its contribution margin per unit is $16. 
B)Uniforms,because its contribution margin per hour is $8. 
C)Caps,because its contribution margin per hour is $16 
D)Caps,because its contribution margin per unit is $8.

Quizplus · Accepted Answer

To maximize operating profits, the company should choose the product with the highest contribution margin per machine hour.

Caps: 
Contribution margin per unit = $10 - $6 = $4 
Contribution margin per machine hour = $4/0.5 hour = $8/hour

Uniforms: 
Contribution margin per unit = $26 - $10 = $16 
Contribution margin per machine hour = $16/2 hour = $8/hour

Thus, caps have a higher contribution margin per machine hour and should be selected to maximize operating profits.

Pete's Sports Products Makes Caps and Uniforms