Question

Bubble Company produces a variety of bottles from recycled plastic. The company has one particular machine on which it can produce either of two types of water bottles, 1-liter bottles or 1/2-liter bottles. Sales demand for both products is such that the machine could operate at full capacity on either of the products, and Bubble can sell all output at current prices. One unit of the 1/2-liter product requires one hour of machine time per unit of output, and one unit of the 1-liter bottle requires two hours of machine time. Each “unit” is a box that contains 150 bottles. Following are the costs per unit for the bottles: Per Unit (150 bottles in a unit) 1/2-Liter Bottles 1-Liter Bottles $15 $27 $ 4 1 $ 7 1 Selling price Costs Materials Labor Machine maintenance and depreciationa Allocated portion of fixed factory costs Total cost per unit Gross margin per unit 4 8 3 3 $19 $12 $ 3

Answer 1

Answer
CALCULATION OF CONTRIBUTION MARGIN
		1/2 litre bottle	1 litre bottle
A	Sales per unit	$              15	$           27
	Variable costs per unit:
B	Materials	$                4	$             7
C	Labor	$                1	$             1
D	Machine maintenance & depreciation	$                4	$             8
E=B+C+D	Total variable cost per unit	$                9	$           16
F=A-E	Contribution margin per unit	$                6	$           11
G	Number of machine hours required per unit	1	2
H=F/G	Contribution margin per hour of machine time	$                6	$        5.50
a-1	Contribution margin per hour of machine time	$                6	$        5.50
a-2 Bubble should produce ½ litre bottle only since contribution margin per machine hour is higher