Consider the following production and cost data for two products, L and C: A total of 60,000 machine minutes are available each period and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

A) $720,000
B) $840,000
C) $780,000
D) $1,560,000

Question

Consider the following production and cost data for two products, L and C:

A total of 60,000 machine minutes are available each period and there is unlimited demand for each product.What is the largest possible total contribution margin that can be realized each period?

A) $720,000
B) $840,000
C) $780,000
D) $1,560,000

CHLOE SMITH · Accepted Answer

Final Answer : B, Explanation :  To maximize the total contribution margin, we need to allocate the available machine minutes between the two products in a way that maximizes the contribution margin per minute.Product L has a contribution margin per minute of $20/minute ($5,000/250 minutes) and product C has a contribution margin per minute of $12/minute ($3,000/250 minutes). Therefore, we should allocate as many machine minutes as possible to product L until its contribution margin per minute falls below that of product C.Assuming all available machine minutes are used, we can produce 250 units of product L (11,000 machine minutes) and 200 units of product C (10,000 machine minutes). This would result in a total contribution margin of:(250 units of L x $20 contribution margin per unit) + (200 units of C x $12 contribution margin per unit) = $5,000 + $2,400 = $7,400Multiplying this by the number of periods in a year (assuming annual periods) gives:$7,400/period x 12 periods/year = $88,800/year.Therefore, the largest possible total contribution margin that can be realized each period is $88,800 or $840,000 annually (option B).   Because there is unlimited demand for each product, all of the available capacity should be used to produce Product C.Production of Product C = 60,000 machine minutes ÷ 8 machine-minutes per unit = 7,500 unitsTotal contribution margin = $112 per unit × 7,500 units = $840,000

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