Answer:
Total contribution margin of the optimal mix =$<u> 1,032,000</u>
Explanation:
<em>Whenever a company is faced with a limiting factor i.e a resource in short supply, the company should allocate the resource to the product with he highest contribution per unit of the scare resource</em>
Product Cont/unit machine hr /unit cont/hr Ranking
classic $13 per unit 0.2 hour 65 per hour Ist
Fancy $21 per unit 0.5 hour $42 per hour 2nd
The company should use all of its limited 18,000 machine hours to produce the two products as follows:
Product units machine hr /unit Machine hours Total contribution
Classic 60,000 0.2 12,000 780,000
Fancy 12,000** 0.5 <u> 6,000</u><u> * </u> <u> 252,000</u>
<u>18,000 </u> $ <u>1,032,000</u>
<u />
Total contribution margin of the optimal mix =$<u> 1,032,000</u>
* this represent balance of machine hours after 12,000 had been devoted to the production of classic
** This is quantity of Fancy that can be produced using 6000 hours
= 6000/0.5 = 12,000 units
