Whitacre Products Inc. makes two products—P32W and I90J. Product P32W's selling price is $44.00 and its unit variable cost is $26.40. Product I90J's selling price is $220.00 and its unit variable cost is $198.00. The monthly demand is 3,500 units for product P32W and 760 units for I90J. The constrained resource is a particular machine that is available for 9,800 minutes each month. Each unit of product P32W requires 2 minutes on this machine and each unit of product I90J requires 10 minutes on this machine.
-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)$22.00 per minute
B)$2.20 per minute
C)$17.60 per minute
D)$8.80 per minute

Question

Quizplus · Accepted Answer

To determine the maximum amount the company should pay for the constrained resource, we need to calculate the additional contribution margin that could be generated if the constrained resource was available. 
For product X: 50 units/hr * ($35 selling price - $25 variable cost) = $500/hr 
For product Y: 75 units/hr * ($20 selling price - $12 variable cost) = $540/hr 
Total additional contribution margin per hour = $1,040/hr
If the constrained resource is a machine that costs $132/hr and has a capacity of 60 minutes/hr, then the company should be willing to pay up to: 
$1,040/hr ÷ 60 minutes/hr = $17.33/minute 
However, the question is asking for the maximum amount the company should pay, meaning they would break even on the cost of the machine. So, the answer is: 
$132 ÷ 60 = $2.20/minute 
Therefore, the company should be willing to pay up to $2.20 per minute to obtain enough of the constrained resource to satisfy demand for the two existing products.