Question

Bruce Corporation makes four products in a single facility. These products have the following unit product costs:

Products
A B C D
Direct materials $16.10 $20.00 $13.00 $15.70
Direct labor 18.10 21.50 15.90 9.90
Variable manufacturing overhead 4.90 6.10 8.60 5.60
Fixed manufacturing overhead 28.00 14.90 15.00 17.00
Unit product cost 67.10 62.50 52.50 48.20

Additional data concerning these products are listed below.

Products
A B C D
Grinding minutes per unit 2.25 1.35 0.95 0.55
Selling price per unit $81.20 $73.60 $70.40 $65.10
Variable selling cost per unit $3.10 $3.60 $3.30 $4.00
Monthly demand in units 3,500 2,500 2,500 4,500

The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines. Direct labor is a variable cost in this company.

Required:
Which product makes the MOST profitable use of the grinding machines?

Answer 1

Product D

Step-by-step explanation:

Calculation to determine Which product makes the MOST profitable use of the grinding machines

First step is to calculate the Variable cost per unit

Products

A B C D

Direct materials $16.10 $20.00 $13.00 $15.70

Add Direct labor 18.10 21.50 15.90 9.90

Add Variable manufacturing overhead 4.90 6.10 8.60 5.60

Add Variable selling cost per unit $3.10 $3.60 $3.30 $4.00

Variable cost per unit $42.20 $51.60 $40.80 $35.20

Now let calculate the product that makes the MOST profitable use of the grinding machines

Selling price per unit $81.20 $73.60 $70.40 $65.10

Less Variable cost per unit $42.20 $51.60 $40.80 $35.20

=Contribution margin per unit $39 $22 $29.60 $29.90

÷Grinding minutes per unit 2.25 1.35 0.95 0.55

=Contribution per grinding minutes $17.33 $16.30 $31.16 $54.36

Therefore Based on the above calculation the product that makes the MOST profitable use of the grinding machines is PRODUCT D because it has the highest Contribution per grinding minutes of the amount of $54.36