Bruce Corporation makes four products in a single facility. These products have

Question

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

Additional data concerning these products are listed below.

The grinding machines are potentially the constraint in the production facility. A total of 9,800 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Up to how much should the company be willing to pay for one additional minute of grinding machine time if the company has made the best use of the existing grinding machine capacity? (Round off to the nearest whole cent.)

Products A B C D Direct materials $ 19.90 $ 15.20 $ 20.80 $ 23.20 Direct labor 12.20 8.70 10.50 7.40 Variable manufacturing overhead $ 1.60 $ 2.10 $ 2.00 $ 2.10 Fixed manufacturing overhead 10.80 11.90 8.80 10.70 Unit product cost 44.50 37.90 42.10 43.40

Explanation / Answer

In case the grinding minutes is constraint i.e. if demand of all product can not be satisfied, the company can pay maximum of $ 18.33 per grinding minute.

In our case based on demand of individual products and total grinding time taken, entire demand is satisfied with 9,800 grinding minutes.

Procuct A B C D Selling Price 59.3 51.7 59.5 55.6 Variable Costs: - Direct Material 19.9 15.2 20.8 23.2 - Direct Labour 12.2 8.7 10.5 7.4 - Variable Mfg. Overhead 1.6 2.1 2 2.1 - Variable Selling Cost 3.6 1.5 2.2 3.6 Contribution Margin 22 24.2 24 19.3 Grinding minutes per Unit 1.2 0.7 0.6 0.6 Contribution Margin per Grinding Minute            18.33             34.57             40.00     32.17 Ranking of Production 4th 2nd 1st 3rd

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