Question

Anne Sugar makes large ceramic pots for use in outdoor landscaping. She currently has two models, one square and the other round. Because of the slze of Anne's creations, only one pot can be fired In the kiln at a time. Information about each model follows: Round $157 $101 3.5 hours Square $71 $21 2.5 hours Sales price Variable cost Firing time Assume that Anne can sell as many pots as she can create but that she Is Ilmited as to the number of hours that the klln can be run. Compute the contribution margin per unit and contribution margin per hour of firing time. Square Ceramic Pot Round Ceramic Pot Contribution Margin per Unit Contribution Margin per Hour Which type of pot should Anne produce to maximize her short-term profit? Square Ceramic Pot Round Ceramic Pot Both

Answer 1

Contribution margin per unit

Contribution margin per unit for Square ceramic port = Selling price per unit – Variable cost per unit

= $71.00 per unit - $21.00 per unit

= $50.00 per unit

Contribution margin per unit for Round ceramic port = Selling price per unit – Variable cost per unit

= $157.00 per unit - $101.00 per unit

= $56.00 per unit

Contribution margin per hour

Contribution margin per hour for Square ceramic port = Contribution margin per unit / Firing time per unit

= $50.00 per unit / 2.5 Hours

= $20.00 per hour

Contribution margin per hour for Round ceramic port = Contribution margin per unit / Firing time per unit

= $56.00 per unit / 3.5 Hours

= $16.00 per hour