Blomstrom Products Inc. makes two products-N81W and V55S. Product N81W's selling price is $20.00 and its unit variable cost is $12.00. Product V55S's selling price is $108.00 and its unit variable cost is $97.20. The monthly demand is 3,940 units for product N81W and 1,140 units for V55S. The constrained resource is a particular machine that is available for 10,400 minutes each month. Each unit of product N81W requires 2 minutes on this machine and each unit of product V55S requires 6 minutes on this machine.
-Up to how much should the company be willing to pay to obtain enough of the constrained resource to satisfy demand for the two existing products?
A) $4.00 per minute
B) $1.80 per minute
C) $8.00 per minute
D) $10.80 per minute

Question

Quizplus · Accepted Answer

To calculate the contribution margin per minute on the constrained resource, we first need to determine the contribution margin per unit for each product.

Product N81W: 
Selling Price - Unit Variable Cost = $20.00 - $12.00 = $8.00

Product V55S: 
Selling Price - Unit Variable Cost = $108.00 - $97.20 = $10.80

Next, we need to calculate the number of units of each product that can be produced within the 10,400 minutes of available machine time.

Product N81W: 
2 minutes per unit x 3,940 units = 7,880 minutes

Product V55S: 
6 minutes per unit x 1,140 units = 6,840 minutes

Total minutes used: 7,880 minutes + 6,840 minutes = 14,720 minutes

This exceeds the available machine time of 10,400 minutes, so the company needs to choose the product mix that maximizes contribution margin per minute on the constrained machine.

Contribution margin per minute for N81W: 
$8.00 / 2 minutes = $4.00 per minute

Contribution margin per minute for V55S: 
$10.80 / 6 minutes = $1.80 per minute

Therefore, the company should be willing to pay up to $1.80 per minute to obtain enough of the constrained resource to satisfy demand for the two existing products.