Question

A fire recently destroyed a substantial portion of Sheridan Company's production capacity. It will be many months before capacity can be restored. During this period, demand for the firm's products will exceed the company's ability to produce them. Per-unit data on the firm's three major products is summarized as follows: Product Selling price Variable costs Fixed costs Operating profit A $83 40 15 $28 B с $92 $74 23 27 20 11 $49 $36 Fixed costs have been allocated to the products on the basis of the labour hours required to produce each product. The major capacity constraint is the availability of time on a processing machine. Each unit of Product A and Product C requires 2 hours of processing on the machine, whereas Product B requires 3 hours. Calculate contribution margin per hour for each product. (Round answers to 2 decimal places, e.g. 15.25.) Contribution margin per hour Product A $ Product B Product C If demand for each of the products is greater than the firm's ability to meet that demand, which product should the firm produce first? If enough capacity exists to produce two products, which product should be produced second?

Answer 1

Solution:
1	Contrybution margin per hour for each product
	Contrybution margin per unit = Sales - Variable cost
	contrybution margin per hour = Contrybution per unit/ Hours per unit
	Product A = $83 - $40 = $43 $43/2 = $21.5 Per hour
	Product B = $92 - $23 = $69      $69/3 = $23   Per hour
	Product C = $74 - $27 = $47      $47/2 = $23.50   Per hour
2	If demand for each of the products is greater than the firm's ability to meet that demand, the firm
	Should first produce Product C , as it has highest Contrybution margin per hour
3	If enough capacity exists to produce two products , the firm should produce second product
	is Product B , as it has second highest Contrybution margin per hour
4	The maximum amount the firm is willing to pay is
	900 units * Variable cost of product A
	900 * $40 = $36,000