Lie Around Furniture manufactures two products: Couches and Beds. The following data are available: The company can manufacture 4 couches per machine hour and 2 beds per machine hour. The company's production capacity is 10,100 machine hours per month.
What is the contribution margin per machine hour for couches?
A)$3640
B)$520
C)$130
D)$780

Question

Lie Around Furniture manufactures two products: Couches and Beds. The following data are available:  The company can manufacture 4 couches per machine hour and 2 beds per machine hour. The company's production capacity is 10,100 machine hours per month.
What is the contribution margin per machine hour for couches?
A)$3640 
B)$520 
C)$130 
D)$780

Quizplus · Accepted Answer

To calculate the contribution margin per machine hour for couches, we need to first calculate the contribution margin per unit of couches. Let's assume that the selling price of a couch is $800 and the variable cost per unit is $400. Therefore, the contribution margin per unit of couches would be $400 ($800 - $400).

Now, we need to divide the contribution margin per unit of couches by the number of machine hours required to manufacture a couch. As given in the question, 4 couches can be manufactured per machine hour. Therefore, the contribution margin per machine hour for couches would be $100 ($400/4).

For beds, assuming the selling price per bed is $700 and the variable cost per unit is $500, the contribution margin per unit of beds would be $200. Since 2 beds can be manufactured per machine hour, the contribution margin per machine hour for beds would be $100 ($200/2).

Now, we need to calculate the contribution margin per machine hour for the company. To do this, we need to first calculate the total contribution margin for the company. Let's assume that the company sells 1,000 couches and 2,500 beds per month. Therefore, the total contribution margin for couches would be $400,000 (1,000 couches x $400 contribution margin per unit) and the total contribution margin for beds would be $500,000 (2,500 beds x $200 contribution margin per unit). Thus, the total contribution margin for the company would be $900,000 ($400,000 + $500,000).

Since the company has a production capacity of 10,100 machine hours per month, we can divide the total contribution margin by the total number of machine hours to get the contribution margin per machine hour for the company. Therefore, the contribution margin per machine hour for the company would be $89.11 ($900,000/10,100).

Now, we can compare the contribution margin per machine hour for couches ($100) and beds ($100) with the contribution margin per machine hour for the company ($89.11). Since both couches and beds have a higher contribution margin per machine hour than the company, both products should be manufactured. However, if there were any constraints such as limited demand or limited resources for manufacturing either product, then a different decision would need to be made.

Lie Around Furniture Manufactures Two Products: Couches and Beds