Question

$90 Norton's Mufflers manufactures three different product lines: Model X, Model Y, and, Model Z. Considerable market demand exists for all models. The following per unit data apply: Model X Model Y Model Z Selling price $80 $100 Direct materials 30 Direct labour ($10 per hour) 15 15 20 Variable support costs ($5 per machine-hour) 5 10 10 Fixed support costs 20 20 30 30 20 Required: a. For each model, compute the contribution margin per unit.[2 Mark) b. For each model, compute the contribution margin per machine-hour.(4 Mark) c. If there is excess capacity, which model is the most profitable to produce? Why?(2 Mark) d. If there is a machine breakdown, which model is the most profitable to produce? Why? (2 Marks)

Answer 1

contribution margin is sales- variable cost

variable cost is the costs that changes with change in production.

	X	Y	Z
SELLING PRICE	80	90	100
less
direct material	30	30	30
Labor	15	15	20
variable support cost	5	10	10
contribution margin per unit	$30[80-30-15-5]	$35[90-30-15-10]	$40[100-30-20-10]

b.margin per machine hour

	X	Y	Z
SELLING PRICE	80	90	100
less
direct material	30	30	30
Labor	15	15	20
variable support cost	5	10	10
contribution margin	$30	$35	$40
machine hour	1 [5/$5per machine hour]	2 [$10/$5 per machine hour]	2 [$10/$5per machine hour]
contribution margin per rmachine hour	$30[30/1]	$17.5[35/2]	$20[40/2]

c.if there is excess capacity to produce units than model Z should be produced as it have highest contribution margin per unit.

d. if there is machine hour constraint than model X should be produced as it has highest contribution margin per machine hour.it is most profitable as it produce highest profit per constrained resources.