The management of Tamondong Corporation has provided the following data concerning its two products: The constrained resource is a particular machine that is available for 10, 200 minutes each month. Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?
A)$20.40 per minute
B)$3.60 per minute
C)$54.00 per minute
D)$6.80 per minute

Question

The management of Tamondong Corporation has provided the following data concerning its two products:  The constrained resource is a particular machine that is available for 10, 200 minutes each month. Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?
A)$20.40 per minute 
B)$3.60 per minute 
C)$54.00 per minute 
D)$6.80 per minute

Quizplus · Accepted Answer

To determine the maximum amount Tamondong Corporation should be willing to pay for the constrained resource, we need to calculate the contribution margin per minute for each product.

For product A: contribution margin per unit = $16 - $7 = $9
Machine minutes per unit = 0.25
Contribution margin per minute = $9 / 0.25 = $36

For product B: contribution margin per unit = $12 - $5 = $7
Machine minutes per unit = 0.2
Contribution margin per minute = $7 / 0.2 = $35

To maximize profit, Tamondong Corporation should prioritize the product with the higher contribution margin per minute (product A in this case). Therefore, the maximum amount they should be willing to pay for the constrained resource is equal to the contribution margin per minute for product A, which is $36.

However, option A and C are way off from this value, and option B is the closest at $3.60 per minute. Thus, the best choice is B.

The Management of Tamondong Corporation Has Provided the Following Data