Special Decisions and Capital Budgeting: Determining which product to emphasize

Question

Special Decisions and Capital Budgeting: Determining which product to emphasize

P25-36B IPond Corp. produces two lines of MP3 players: 512MB and 1GB. Because IPond can sell all the MP3 players it can produce, the owners are expanding the plant. They are deciding which product line to emphasize. To make this decision, they assemble the following data Per Unit IPond 1 GB IPond 512 MB Sale price Variable expenses Contribution margin Contribution margin ratio . S90 20 570 77.8%). : $30 are 62.5% i ! After expansion, the factory will have a production capacity of 4,500 machine hours per month. The plant can manufacture either 24 IPond 1 GB players or 60 IPond 512 MB players per machine hout. Requirements 1. Identify the constraining factor for IPond. (p. 1258) 2. Prepare an analysis to show which product line to emphasize. (p. 1258)

Explanation / Answer

1) The constraining factor is the number of machine hours available. 2) As machine hours is the constrained resource, the product which gives the highest contribution margin per hour of machine hour should be emphasized. The CM per machine hour is calculated and given in the table below: 1 GB 512 MB Contribution margin per unit (as given) $       70.00 $       30.00 Number of units produced per machine hour 24 60 Contribution margin per machine hour $       1,680 $       1,800 As 512 MB gives more contribution margin per machine hour it should be emphasized.

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