Niva Co. manufactures three products: Bales; Tales; and Wales. The selling price

Question

Niva Co. manufactures three products: Bales; Tales; and Wales. The selling prices are: 55; 78; and 32,
respectively. The variable costs for each product are: 20; 50; and 15, respectively. Each product must go
through the same processing in a machine that is limited to 2,000 hours per month. Bales take 7 hours to
process, Tales take 4 hours, and Wales take 1 hour.

Assuming that Niva Co. can sell all of the products they can make, what is the maximum
contribution margin they can earn per month?

Assuming that Niva produced enough product with the highest contribution margin per unit to use
1,000 hours of machine time. Product demand does not warrant any more production of that product.
What is the maximum additional contribution margin that can be realized by utilizing the remaining
1,000 hours on the product with the second highest contribution margin per hour?

Explanation / Answer

1. contribution margin = selling price - variable cost Bales = 55-20= $35 Tales=78-50= $28 Wales=32-15= $17 contribution margin per machine hr Bales =$35/7 = $5/hr Tales =$28/4 = $7/hr Wales = $17/1 = $17/hr Wales has the highest contribution margin per machine hr. therefore all the 1000hr should be given to produce WALES Maximum contribution margin = $17*2000= $34,000 2. After Wales, Tales has the second highest contribution margin per machine hr maximum additional contribution margin that can be realized by utilizing the remaining 1,000 hours =$7*1000=$7000

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