Spencer Company manufactures and sells three products. Relevant per unit data concerning each product are given below.
Product
A
B
C
Selling price $9 $12 $14
Variable costs and expenses $3 $9.50 $12
Machine hours to produce 2 1 2
Compute the contribution margin per unit of the limited resource (machine hour) for each product. (Round answers to 2 decimal places, e.g. 10.50.)
Product A $
Product B $
Product C $
Assuming 1,500 additional machine hours are available, which product should be manufactured?
Prepare an analysis showing the total contribution margin if the additional hours are (1) divided equally among the products, and (2) allocated entirely to the product identified in (b) above. (Round contribution margin to 2 decimal places, e.g. 10.50.)
Divided equally among the products:
Product
A
B
C
Machine hours
Contribution margin per unit
of limited resource
$
$
$
Total contribution margin
$
$
$
The total contribution margin is $.
Allocated entirely to the product identified in the section above.
Machine hours
Contribution margin per unit of limited resource
$
Total contribution margin
$
Product A: Contribution margin per unit = Selling price - Variable costs and expenses = $9 - $3 = $6
Product B: Contribution margin per unit = Selling price - Variable costs and expenses = $12 - $9.50 = $2.50
Product C: Contribution margin per unit = Selling price - Variable costs and expenses = $14 - $12 = $2
Since the limited resource is machine hours, we need to calculate the contribution margin per unit of machine hour for each product.
Product A: Contribution margin per unit of machine hour = Contribution margin per unit / Machine hours to produce = $6 / 2 = $3
Product B: Contribution margin per unit of machine hour = Contribution margin per unit / Machine hours to produce = $2.50 / 1 = $2.50
Product C: Contribution margin per unit of machine hour = Contribution margin per unit / Machine hours to produce = $2 / 2 = $1
Assuming 1,500 additional machine hours are available, we should manufacture the product with the highest contribution margin per unit of machine hour, which is Product A with $3.
When the additional hours are divided equally among the products:
Product A: Total contribution margin = Contribution margin per unit of machine hour * Additional machine hours = $3 * 500 = $1500
Product B: Total contribution margin = Contribution margin per unit of machine hour * Additional machine hours = $2.50 * 500 = $1250
Product C: Total contribution margin = Contribution margin per unit of machine hour * Additional machine hours = $1 * 500 = $500
Total contribution margin when divided equally among the products = $1500 + $1250 + $500 = $3250
When the additional hours are allocated entirely to Product A:
Total contribution margin = Contribution margin per unit of machine hour * Additional machine hours = $3 * 1500 = $4500
Therefore, the total contribution margin if the additional hours are (1) divided equally among the products is $3250, and (2) allocated entirely to Product A is $4500.
To compute the contribution margin per unit of the limited resource (machine hour) for each product, we need to divide the contribution margin by the number of machine hours required to produce each product.
Product A:
Contribution margin per unit = Selling price - Variable costs and expenses
= $9 - $3
= $6
Contribution margin per unit of limited resource = Contribution margin per unit / Machine hours to produce
= $6 / 2
= $3
Product B:
Contribution margin per unit = Selling price - Variable costs and expenses
= $12 - $9.50
= $2.50
Contribution margin per unit of limited resource = Contribution margin per unit / Machine hours to produce
= $2.50 / 1
= $2.50
Product C:
Contribution margin per unit = Selling price - Variable costs and expenses
= $14 - $12
= $2
Contribution margin per unit of limited resource = Contribution margin per unit / Machine hours to produce
= $2 / 2
= $1
Therefore, the contribution margin per unit of limited resource for each product is as follows:
Product A: $3
Product B: $2.50
Product C: $1
Assuming 1,500 additional machine hours are available, the product that should be manufactured is the one with the highest contribution margin per unit of limited resource. In this case, it would be Product A with a contribution margin per unit of $3.
Now, let's prepare an analysis showing the total contribution margin if the additional hours are (1) divided equally among the products, and (2) allocated entirely to the product identified above.
Divided equally among the products:
Machine hours: 1,500 / 3 = 500 hours per product
Product A:
Contribution margin per unit of limited resource: $3
Contribution margin per 500 hours: $3 * 500 = $1,500
Product B:
Contribution margin per unit of limited resource: $2.50
Contribution margin per 500 hours: $2.50 * 500 = $1,250
Product C:
Contribution margin per unit of limited resource: $1
Contribution margin per 500 hours: $1 * 500 = $500
Total contribution margin: $1,500 + $1,250 + $500 = $3,250
If the additional hours are allocated entirely to Product A:
Machine hours: 1,500 hours
Product A:
Contribution margin per unit of limited resource: $3
Contribution margin per 1,500 hours: $3 * 1,500 = $4,500
Total contribution margin: $4,500
Therefore, the total contribution margin if the additional hours are divided equally among the products is $3,250, and the total contribution margin if the additional hours are allocated entirely to Product A is $4,500.
To compute the contribution margin per unit of the limited resource (machine hour) for each product, you need to divide the contribution margin by the number of machine hours required to produce each product.
For Product A, the contribution margin per unit of the limited resource is:
Contribution margin = Selling price - Variable costs and expenses = $9 - $3 = $6
Machine hours = 2
Contribution margin per unit of limited resource = Contribution margin / Machine hours = $6 / 2 = $3
For Product B, the contribution margin per unit of the limited resource is:
Contribution margin = Selling price - Variable costs and expenses = $12 - $9.50 = $2.50
Machine hours = 1
Contribution margin per unit of limited resource = Contribution margin / Machine hours = $2.50 / 1 = $2.50
For Product C, the contribution margin per unit of the limited resource is:
Contribution margin = Selling price - Variable costs and expenses = $14 - $12 = $2
Machine hours = 2
Contribution margin per unit of limited resource = Contribution margin / Machine hours = $2 / 2 = $1
Therefore, the contribution margin per unit of the limited resource for each product is:
Product A: $3
Product B: $2.50
Product C: $1
Assuming 1,500 additional machine hours are available, you need to compare the total contribution margin for each product to determine which product should be manufactured.
To calculate the total contribution margin if the additional hours are divided equally among the products:
Additional machine hours available = 1,500
Total machine hours for all products = 2 + 1 + 2 = 5
Additional machine hours per product = Additional machine hours available / Total machine hours for all products = 1,500 / 5 = 300
For Product A:
Additional contribution margin = Additional machine hours per product * Contribution margin per unit of limited resource = 300 * $3 = $900
For Product B:
Additional contribution margin = Additional machine hours per product * Contribution margin per unit of limited resource = 300 * $2.50 = $750
For Product C:
Additional contribution margin = Additional machine hours per product * Contribution margin per unit of limited resource = 300 * $1 = $300
Therefore, the total contribution margin if the additional hours are divided equally among the products would be:
Product A: $900
Product B: $750
Product C: $300
Total contribution margin: $1,950
If the additional hours are allocated entirely to the product with the highest contribution margin per unit of the limited resource, which is Product A with $3, then the total contribution margin would be:
Additional contribution margin = Additional machine hours available * Contribution margin per unit of limited resource for Product A = 1,500 * $3 = $4,500
Therefore, the total contribution margin if the additional hours are allocated entirely to Product A would be $4,500.