Kellerman Detailing Service Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected data related to each package is as follows:
Most of the car detailing is done by hand.
Refer to the Kellerman Detailing Service information above. For the upcoming year, there is a maximum of 4,300 direct labor hours available. Management believes that the demand for both the standard and deluxe detailing is limited to 1,000 each per year. If the company maximizes profits, what is the maximum contribution margin the company could have in the upcoming year?

Question

Kellerman Detailing Service Kellerman Detailing Service provides two types of car detailing packages: the standard and the deluxe. Selected data related to each package is as follows:
 Most of the car detailing is done by hand.
Refer to the Kellerman Detailing Service information above. For the upcoming year, there is a maximum of 4,300 direct labor hours available. Management believes that the demand for both the standard and deluxe detailing is limited to 1,000 each per year. If the company maximizes profits, what is the maximum contribution margin the company could have in the upcoming year?

Quizplus · Accepted Answer

To maximize profits, the company should produce the number of standard and deluxe detailing packages such that the contribution margin per direct labor hour is maximized.

Contribution margin per hour for standard package= ($225-$75)/3= $50

Contribution margin per hour for deluxe package= ($300-$120)/4= $45

Therefore, the company should produce only the standard package to utilize all available hours, resulting in a contribution margin of $50 x 4,300 = $215,000. However, the demand for standard detailing is limited to 1,000 per year, so the company should produce 1,000 standard detailing packages and 1,000 deluxe detailing packages.

Total contribution margin = ($50 x 1,000) + ($45 x 1,000) = $95,000 + $11,000 = $106,000.

Thus, the maximum contribution margin the company could have in the upcoming year is $106,000.

Kellerman Detailing Service Kellerman Detailing Service Provides Two Types of Car