Question

Mill Metals Inc. has three grades of metal product, Type 5, Type 10, and Type 20. Financial data for the three grades are as follows: Type 5 Type 10 Type 20 Revenues $43,000 $49,000 $56,500 Variable cost $34,000 $26,500 Fixed cost 8,000 8,000 8,000 Total cost $42,000 $36,000 $34,500 Income from operations $ 1,000 $13,000 $22,000 Number of units + 5,000 + 5,000 5,000 Income from operations per unit $0.20 $2.60 $4.40 Mill's operations require all three grades to be melted in a furnace before being formed. The furnace runs 24 hours a day, 7 days a week, and is a production bottleneck. The furnace hours required per unit of each product are as follows: Type 5: Type 10: Type 20: 6 hours 6 hours 12 hours The Marketing Department is considering a new marketing and sales campaign. Which product should be emphasized in the marketing and sales campaign in order to maximize profitability? Type 10 Determining the unit contribution margin per furnace hour will assist in making your decision. Round the unit contribution margin to two decimal places. Type 5 Type 10 Type 20 Unit contribution margin per furnaces hour 1.500 x $ 3,500 X $ 2,500 X

Answer 1

Mill Metals Inc. Contribution Margin per furnace hour is as follows: Revenue Variable cost Contribution Margin Number of units Unit Contribution Number of hours Unit Contribution per furnace hour Type 5 43000 34000 9000 5000 1.8 Type 10 49000 28000 21000 5000 4.2 Type 20 56500 26500 30000 5000 6 12 0.5 b c = a/b d = c/d 6 0.3 0./ In production constraint environment Type 10 generates higher contribution margin per hour of furnace resource and thus is the most profitable.While Type 20 has largest profit per unit $4.40 and unit contribution margin $6, these would not be correct metrics for determining the product to emphasize in the marketing campaign, assuming the furnace is a bottleneck resource.