Question

Sheridan Company can stall the units it can produce of esther Plain or Fancy but not both Plain has a unit contribution margin of $50 and takes two machine hours to make and Fancy has a unit contribution margin of $51 and takes three machine hours to make. There are 2400 machine hours available to manufacture a product. What should Sheridan do? Make Plain which creates $ more profit per machine hour than Fancy does Make Fancy which creates $24 more profit per unit than Plain does. Make Plain because more units can be made and sold than Fancy. The same total profits exist regardless of which product is made Question Attempts of used

Answer 1

Solution 11:

Plain's contribution margin per machine hour = $50 / 2 = $25 per machine hour

Fancy's contribution margin per machine hour = $51/ 3 = $17 per machine hour

Plain contribution margin per machine hour is higher by $25 -$17 = $8

Therefore, "make Plain which creates $8 more profit per machine hour than Fancy does".

Hence first option is correct.

Solution 2 :

Total Relevant cost of making = variable cost of making + opportunity cost = $600000 + $176000 = $776,000

Relevant cost of buying from outside supplier = 100000 units *$4.50 % $450,000

Net increase in Net income of accepting supplier's offer = $776000 - $450000 = $326,000

Hence, second option is correct.