Question

Wright Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below:

	Product
	C			D			E
Selling price	$	90		$	50		$	85
Variable costs	$	50		$	40		$	55
Fixed costs	$	30		$	7		$	27
Tapping machine time (minutes)		10			4			5

Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three products exceeds the company's productive capacity. The tapping machine is the constraint, with only 2,700 minutes of tapping machine time available this week.

Required:

a. Given the tapping machine constraint, which product should be emphasized?

	Product C
	Product D
	Product E

b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above, up to how much should the company be willing to pay for an additional hour of tapping machine time?

Answer 1

a	The product to emphasize can be determined by calculating Contribution Margin per unit of the limiting resurce which is tapping machine time
		Product
		C	D	E
	Selling Price per unit	$ 90	$ 50	$ 85
	Variable Cost per unit	$ 50	$ 40	$ 55
	Contribution Margin	$ 40	$ 10	$ 30
	Tapping Machine Time ( minutes)	10	4	5
	Contribution Margin per minute	$ 4	$ 2.5	$ 6
	Product E should be emphasized because ith has the greatest Contribution Margin per unit of the limiting factor.
b	If additional tapping machine time would be used to produce more of Product E, the time would be worth 60 minutes per hour * $ 6 contribution margin per minute = $ 360
	Thank You !