The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows:
$$\begin{array} { l r r }
& \text { Oxy } & \text { Sonic } \
& \text { Clearner } & \text { Clearner } \
\text { Sales Price } & \$ 75 & \$ 44 \
\text { Variable cost per unit } & 40 & 21
\end{array}$$
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine time is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit.
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What is the maximum contribution margin Garrison can achieve during a year?
A) $444,250.
B) $1,014,000.
C) $488,000.
D) $855,500.

Question

The Garrison Company manufactures two products: Oxy Cleaner and Sonic Cleaner. The costs and revenues are as follows:
$$\begin{array} { l r r } 
& \text { Oxy } & \text { Sonic } \
& \text { Clearner } & \text { Clearner } \
\text { Sales Price } & \$ 75 & \$ 44 \
\text { Variable cost per unit } & 40 & 21
\end{array}$$
Total demand for Oxy is 10,000 units and for Sonic is 6,000 units. Machine time is a scarce resource. During the year, 50,000 machine hours are available. Oxy requires 4 machine hours per unit, while Sonic requires 2.5 machine hours per unit.
-
What is the maximum contribution margin Garrison can achieve during a year?
A) $444,250.
B) $1,014,000.
C) $488,000.
D) $855,500.

Quizplus · Accepted Answer

The maximum contribution margin is achieved by producing the product with the highest contribution margin per unit, up to the point where the scarce resource (machine time) is fully utilized. In this case, Oxy has a higher contribution margin per unit ($35) than Sonic ($23). Therefore, Garrison should produce as many units of Oxy as possible, up to the point where the machine time is fully utilized.The total machine time required to produce 10,000 units of Oxy is 40,000 hours (10,000 units * 4 hours per unit). This leaves 10,000 hours of machine time available for Sonic. The maximum number of units of Sonic that can be produced with the remaining machine time is 4,000 units (10,000 hours / 2.5 hours per unit).Therefore, the maximum contribution margin that Garrison can achieve during a year is:Oxy: 10,000 units * $35 contribution margin per unit = $350,000Sonic: 4,000 units * $23 contribution margin per unit = $94,250Total contribution margin = $350,000 + $94,250 = $444,250

The Garrison Company Manufactures Two Products: Oxy Cleaner and Sonic