2. Petco makes 2 products, dog collars and cat collars. Each passes through the

Question

2. Petco makes 2 products, dog collars and cat collars. Each passes through the cutting machine, which is the binding constraint. Dog collars take 6 minutes on the cutting machine and have a contribution margin per unit of $10. Cat collars take 4 minutes on the cutting machine and have a contribution margin per unit of $8.
Assume that there are 2,000 hours available on the cutting machine and that the demand for each product is 15,000 units. If one more hour of machine time could be obtained, how much would profits increase? (Points : 2)
$10
$8
$120
$100

Explanation / Answer

Dog collars: Time to produce 1 unit         = 6 minutes Contribution margin per unit = $10 Units produced in 1 hour     = 10 units Contribution margin per 1 hour = $10 x 10 units                                            = $100. Cat collars: Time to produce 1 unit         = 4 minutes Contribution margin per unit = $8 Units produced in 1 hour     = 15 units Contribution margin per 1 hour = $8 x 15 units                                            = $120. So it is preferable to produce the Cat collar products during the extra hour as it giving the maximium increase in the profit. So increase in profit = $120. Time to produce 1 unit         = 6 minutes Contribution margin per unit = $10 Units produced in 1 hour     = 10 units Contribution margin per 1 hour = $10 x 10 units                                            = $100. Cat collars: Time to produce 1 unit         = 4 minutes Contribution margin per unit = $8 Units produced in 1 hour     = 15 units Contribution margin per 1 hour = $8 x 15 units                                            = $120. So it is preferable to produce the Cat collar products during the extra hour as it giving the maximium increase in the profit. So increase in profit = $120. Time to produce 1 unit         = 4 minutes Contribution margin per unit = $8 Units produced in 1 hour     = 15 units Contribution margin per 1 hour = $8 x 15 units                                            = $120. So it is preferable to produce the Cat collar products during the extra hour as it giving the maximium increase in the profit. So increase in profit = $120.

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