Widgeon Co. manufactures three products: Bales; Tales; and Wales. The selling prices are: $55; $78; and $32, respectively. The variable costs for each product are: $20; $50; and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process, Tales take 7 hours, and Wales take 1 hour. Assume that Widgeon produced enough product with the highest contribution margin per unit to use 1,000 hours of machine time. Product demand does not warrant any more production of that product. What is the maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours on the product with the second highest contribution margin per hour?
A) $35,000
B) $7,000
C) $4,000
D) $28,000

Question

Quizplus · Accepted Answer

To maximize the additional contribution margin, we need to focus on the product with the second highest contribution margin per hour.

First, let's calculate the contribution margin per hour for each product:
- Bales: ($55 - $20) / 5 = $7
- Tales: ($78 - $50) / 7 = $4
- Wales: ($32 - $15) / 1 = $17

Since we want to focus on the product with the second highest contribution margin per hour, we can see that Tales has the highest potential. Therefore, we need to determine how many Tales can be produced with the remaining 1,000 hours of machine time.

We can set up the following equation to find out:
7(hours per Tale) * X(number of Tales produced) <= 1,000(remaining machine hours)

Solving for X, we get:
X <= 142.86

Since we cannot produce a fraction of a product, we can only produce a maximum of 142 Tales. Let's calculate the additional contribution margin for 142 Tales:
- Revenue: 142 x $78 = $11,076
- Variable cost: 142 x $50 = $7,100
- Contribution margin: $11,076 - $7,100 = $3,976

Therefore, the maximum additional contribution margin that can be realized is $3,976 or approximately $4,000. The correct answer is B.