Question

12. Braun's Brakes 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 2 Selling price S50 S60 $70 Direct materials 6 6 6 Direct labor (S12 per hour) 12 12 24 Variable support costs (S4 per machine- hour) 4 8 8 Fixed support costs 10 10 10 If there is a machine breakdown, which model is the most profitable to produce? A) Model X B) Model Y C) Model Z D) Models Y and Z

Answer 1

Answer

• The concept says that if ‘any’ factor is in limited amount, THAT product will be given preference in production that provides maximum contribution margin ‘per unit of that limited resource’.
• Here, the limited resource is ‘machine hours’ because the case is of Machine Break Down.
• Now, this problem can be solved in 3 simple steps:

#1: We need to know how many machine hours one unit of each model consumes.
#2: We calculate contribution margin per unit for each model
#3: We then find contribution margin per unit of machine hours for each model.
#4; The model that has the maximum contribution margin per machine hour will be MOST PROFITABLE to produce.

• Step #1: No. of machine hours consumed by 1 unit

Working		X	Y	Z
A	Variable Suport cost per unit	$                  4	$                 8	$             8
B	Rate per machine hours	$                  4	$                 4	$             4
C = A / B	No. of machine hours required per unit	1	2	2

• Step #2: Contribution margin per unit of model

Working		X	Y	Z
A	Sale price per unit	$                50	$               60	$          70
	Direct material per unit	$                  6	$                 6	$             6
	Direct Labor per unit	$                12	$               12	$          24
	Variable Support Costs	$                  4	$                 8	$             8
B	Total Variable cost per unit	$                22	$               26	$          38
C = A - B	Contribution margin per unit	$                28	$               34	$          32

• Step #3: Calculate contribution margin per machine hour

Working		X	Y	Z
A	Contribution margin per unit [as per Step #2]	$          28	$          34	$            32
B	No. of machine hours required per unit [as per Step #1]	1	2	2
C = A/B	Contribution margin per machine hour	$          28 [maximum]	$          17	$            16

• Step #4: Answer: Since Model X has the Maximum Contribution Margin per machine hour, Model X will be most profitable to produce.

• Correct Answer = Option ‘A’ Model ‘X’