Question

A company produces and sells three products.

	Product 1	Product 2	Product 3
Selling price per unit	$70	$100	$200
Variable cost per unit	$20	$43	$120
Fixed cost per unit	$10	$14	$25
Machine hours per unit	5	5	20

This company has enough machine hours to make as many units as it can sell of its two most profitable products. If the company has the opportunity to rent more machine hours, what is the most it would be willing to pay per machine hour? (Round to the nearest dollar and cents.)

Answer 1

	Product 1	Product 2	Product 3
Selling price per unit	70	100	200
(-) Variable cost per unit	20	43	120
Contribution margin per unit	50	57	80
(/) Machine hours per unit	5	5	20
Contribution margin per machine hour	10.00	11.40	4.00

Products	Ranks
Product 1	2
Product 2	1
Product 3	3
As the company can produce as many units as it can sell of its two most profitable products, it can produce product 2 and product 2

Maximum price to pay per machine hour = Contribution margin per machine hour of product 3

4.00