Underwood,Inc.manufactures two products.It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month.The table below lists the contribution margin,labor and machine time requirements,and demand for each product.What is the contribution margin per machine hour for Product A?
A)$12.00
B)$15.00
C)$20.00
D)$24.00

Question

Underwood,Inc.manufactures two products.It currently has 2,000 hours of direct labor and 1,000 hours of machine time available per month.The table below lists the contribution margin,labor and machine time requirements,and demand for each product.What is the contribution margin per machine hour for Product A? 
A)$12.00 
B)$15.00 
C)$20.00 
D)$24.00

Quizplus · Accepted Answer

To calculate the contribution margin per machine hour for Product A, we need to divide the contribution margin per unit by the machine hours required per unit.

Contribution margin per unit for Product A = $30 - $15 - $3 = $12
Machine hours required per unit for Product A = 0.5

Therefore, contribution margin per machine hour for Product A = $12 ÷ 0.5 = $24.

However, the question asks for contribution margin per machine hour, not per unit of the product. To determine the best choice, we need to evaluate which product(s) to produce given the limited hours of direct labor and machine time available.

Product A requires 0.5 machine hours per unit, while Product B requires only 0.2 machine hours per unit. If we need to maximize the utilization of available machine hours, we should produce more of Product B.

Contribution margin per unit for Product B = $20 - $8 - $4 = $8
Machine hours required per unit for Product B = 0.2

Contribution margin per machine hour for Product B = $8 ÷ 0.2 = $40

Therefore, the best choice would be to produce only Product B, which has a higher contribution margin per machine hour.