Question

Insiteful Instruments produces two models of binoculars. Information for each model is as follows:

	Model 100								Model 101
Sales price per unit					$	200							$	215
Costs and expenses per unit:
Direct materials	$	51							$	38
Direct labor		33								30
Manufacturing overhead (applied at the rate of $18 per machine-hour, 1/3 of which is fixed and 2/3 variable)		36								72
Variable selling expenses		30								15
Total costs and expenses per unit						150								155
Profit per unit					$	50							$	60
Machine-hours required to produce one unit						2								4

Total manufacturing overhead amounts to $180,000 per month, one-third of which is fixed. The demand for either product is sufficient to keep the plant operating at full capacity (10,000 machine-hours per month). Assume that only one product is to be produced in the future.

a. Prepare a schedule showing the contribution margin per machine-hour for each product.

b. Which of the two products should be discontinued?

Answer 1

Schedule showing the contribution margin per machine-hour for each product :- Particulars Model 100 Model 101 Sales price per unit 200.00 215.00 Less: Variable cost per unit Direct materials 51.00 38.00 Direct labor 33.00 30.00 Manufacturing overhead (18*2*(2/3)),(18*4*(2/3)) 24.00 48.00 Variable selling expenses 15.00 30.00 Total variable cost per unit 138.00 131.00 Contribution margin per unit 62.00 84.00 Machine-hours required to produce one unit 2.00 4.00 Contribution margin per machine hour 31.00 21.00 Since contribution margin per machine hour of Model 100 is more, Model 101 should be dis-continued.