Brown Corporation makes four products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

-Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)
A)$10.60
B)$21.90
C)$0
D)$19.25

Question

Brown Corporation makes four products in a single facility. These products have the following unit product costs:

Additional data concerning these products are listed below.

The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines.
Direct labor is a variable cost in this company.

-Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)
A)$10.60 
B)$21.90 
C)$0 
D)$19.25

Quizplus · Accepted Answer

The company should be willing to pay up to the contribution margin per minute of grinding machine time. This can be calculated as follows:
Contribution margin per unit = Selling price per unit - Variable cost per unit 
= $28 - $12 - $3 - $3 
= $10
Contribution margin per minute = Contribution margin per unit ÷ Time per unit 
= $10 ÷ 2 
= $5
Thus, the company should be willing to pay up to $5 for one additional minute of grinding machine time. Therefore, option D is the best choice as it is the closest to $5.

Brown Corporation Makes Four Products in a Single Facility