Foster Corporation produces two products-P and Q. P sells for $4.00 per unit; Q sells for $5.25 per unit. Variable costs for P and Q are respectively, $2.50 and $3.09. There are 3 570 direct labour hours per month available for producing the two products. Product P requires 3 direct labour hours per unit and Product Q requires 4.5 direct labour hours per unit. The company can sell as many of either product as it can produce. What is the maximum monthly contribution margin that Foster can generate under the circumstances? (Please round to nearest whole dollar.)

Question

Quizplus · Accepted Answer

The contribution margin per unit for P is $1.50 ($4.00 - $2.50) and for Q is $2.16 ($5.25 - $3.09). The contribution margin per labor hour for P is $0.50 ($1.50/3) and for Q is $0.48 ($2.16/4.5). To maximize contribution margin, produce as much of P as possible. With 3,570 hours, produce 1,190 units of P (3,570/3), resulting in a contribution margin of $1,785 (1,190 * $1.50).

Foster Corporation Produces Two Products-P and Q