2. (20 pts) A tool company sells a plain (price $50, variable cost $35) and a pr

Question

2. (20 pts) A tool company sells a plain (price $50, variable cost $35) and a professional (price $100, variable cost $60) circular saw. It takes one machine-hour to produce a professional and 15 minutes to produce a regular saw, There are 40,00 machine-hours available and demand is more than they can produce a) Compute contribution margins and contribution margin ratios for each saw Ifall machine hours are used, compute the total contribution margin for plain saws only and professional saws only. Which saw should be produced? b)

Explanation / Answer

Answer a.

Plain Saw:

Selling Price = $50
Variable Costs per unit = $35

Contribution Margin per unit = Selling Price - Variable Costs per unit
Contribution Margin per unit = $50 - $35
Contribution Margin per unit = $15

Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $15 / $50
Contribution Margin Ratio = 0.30

Professional Saw:

Selling Price = $100
Variable Costs per unit = $60

Contribution Margin per unit = Selling Price - Variable Costs per unit
Contribution Margin per unit = $100 - $60
Contribution Margin per unit = $40

Contribution Margin Ratio = Contribution Margin per unit / Selling Price
Contribution Margin Ratio = $40 / $100
Contribution Margin Ratio = 0.40

Answer b.

If only Plain Saws are produced:

Contribution Margin per unit = $15
Number of hours required per unit = 0.25 (15 minutes)

Contribution Margin per hour = Contribution Margin per unit / Number of hours required per unit
Contribution Margin per hour = $15 / 0.25
Contribution Margin per hour = $60

Number of Machine-hours available = 40,000

Total Contribution Margin = Contribution Margin per hour * Number of Machine-hours available
Total Contribution Margin = $60 * 40,000
Total Contribution Margin = $2,400,000

If only Professional Saws are produced:

Contribution Margin per unit = $40
Number of hours required per unit = 1.00

Contribution Margin per hour = Contribution Margin per unit / Number of hours required per unit
Contribution Margin per hour = $40 / 1
Contribution Margin per hour = $40

Number of Machine-hours available = 40,000

Total Contribution Margin = Contribution Margin per hour * Number of Machine-hours available
Total Contribution Margin = $40 * 40,000
Total Contribution Margin = $1,600,000

So, company should produce only plain saw as contribution margin is higher than contribution margin if only professional saws are produced.

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