Waterways packages some of its products into sets for home installations. One se

ID: 2497622 • Letter: W

Question

Waterways packages some of its products into sets for home installations. One set (small) sells for $77 with variable costs of production for the set at $50. Another set (large) sells for $152 with variable costs of $100. The parts for the $77 set take 9 machine hours to produce. The parts for the $150 set take 20 machine hours to produce.

Given the information above, and assuming all of the package sets produced can be sold each month, illustrate the best use of machine hours.

Small Set Large Set Contribution margin per unit of limited resource $ $

Explanation / Answer

Small Set

Large Set

Sale price

$77

$152

Less: Variable cost

$50

$100

Contribution margin

$27

$52

Required machine hours

Contribution margin per machine hour (Contribution margin / machine hours)

$2.6

Since the company can sell all its output, the best decision is to allocate all machine hours (i.e. scarce resource) to Small Set because contribution margin per machine hour is higher for this Set.