Dropping a product line. Timepiece Products, a clock manufacturer, operates at c

Question

Dropping a product line. Timepiece Products, a clock manufacturer, operates at capacity. Constrained by machine time, the company decides to drop the most unprofitable of its three product lines. The accounting department came up with the following data from last year’s operations:

Manual

Electric

Quartz

Machine Time per Unit

0.4 Hour

2.5 Hours

5.0 Hours

Selling Price per Unit

$20

$30

$50

Less Variable Costs per Unit

10

14

28

Contribution Margin

$10

$16

$22

Required:

Which line should Timepiece Products drop? (Hint: Compute the contribution per machine hour because machine time is the constraint.)

Manual

Electric

Quartz

Machine Time per Unit

0.4 Hour

2.5 Hours

5.0 Hours

Selling Price per Unit

$20

$30

$50

Less Variable Costs per Unit

10

14

28

Contribution Margin

$10

$16

$22

Explanation / Answer

Contribution margin per machine hour:

Manual=10/0.4=25

Electric=16/2.5=6.4

Quartz=22/5=4.4

Quarz line should be dropped as it has least contribution margin per machine hour

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