Manico Corporation produces three products -- X, Y, & Z -- with the following characteristics: The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin?
A)orders for Z first, X second, and Y third
B)orders for X first, Z second, and Y third
C)orders for Y first, X second, and Z third
D)orders for Z first and no orders for X or Y

Question

Manico Corporation produces three products -- X, Y, & Z -- with the following characteristics:  The company has only 2,000 machine-hours available each month. If demand exceeds the company's capacity, in what sequence should orders be filled if the company wants to maximize its total contribution margin?
A)orders for Z first, X second, and Y third 
B)orders for X first, Z second, and Y third 
C)orders for Y first, X second, and Z third 
D)orders for Z first and no orders for X or Y

Quizplus · Accepted Answer

To maximize total contribution margin, the company should produce the products with the highest contribution margin per machine-hour first.

Product X has the highest contribution margin per machine-hour at $40 per hour, followed by Z at $30 per hour, and Y at $25 per hour.

Therefore, orders should be filled in the following sequence:

X first (using 1,000 machine-hours, contributing $40,000 to total contribution margin), followed by Z (using another 667 machine-hours, contributing $20,010 to total contribution margin), and finally Y (using the remaining 333 machine-hours, contributing $8,325 to total contribution margin).

This gives a total contribution margin of $68,335 for the month, maximizing profits.

Manico Corporation Produces Three Products -- X, Y, & Z