a. To compute the contribution margin per unit, we subtract the variable costs per unit from the selling price per unit.
Contribution Margin per Unit=Selling Price per Unit−Variable Costs per Unit
For each product:
For Product X:
Contribution Margin per Unit=$270−($90+$30+$40)=$270−$160=$110
For Product Y:
Contribution Margin per Unit=$290−($60+$30+$60)=$290−$150=$140
For Product Z:
Contribution Margin per Unit=$310−($60+$40+$60)=$310−$160=$150
Let's calculate the total contribution margin for each scenario:
c. If there is excess capacity:
Since Product Z has the highest contribution margin per machine-hour, it is the most profitable to produce.
Let's assume there is enough demand to produce 100 units of each product.
Total contribution margin for Product Z:[ $150 times 100 = $15,000 ]
d. If there is a machine breakdown:
Product Z still has the highest contribution margin per unit. Let's assume the same demand to produce 100 units of each product.
Total contribution margin for Product Z:[ $150 times 100 = $15,000 ]
So, in both scenarios, the most profitable product to produce is Z, and the total contribution margin is $15,000. There is no loss because all products have positive contribution margins.
d. If there is a machine breakdown:In the event of a machine breakdown, we need to consider the contribution margin per unit for each product.
Given the contribution margins per unit we calculated earlier:
- Product X: $110
- Product Y: $140
- Product Z: $150
Since Product Z still has the highest contribution margin per unit, it remains the most profitable to produce even in the event of a machine breakdown.
Now, let's assume the same demand to produce 100 units of each product.
Total contribution margin for Product Z:
$150×100=$15,000
So, even with a machine breakdown, the most profitable product to produce is Z, with a total contribution margin of $15,000. There is no loss because all products have positive contribution margins.
b. To compute the contribution margin per machine-hour, we divide the contribution margin per unit by the number of machine-hours required per unit.
For each product:
For Product X:
Contribution Margin per Machine-Hour=$10$40$110=$27.50
For Product Y:
Contribution Margin per Machine-Hour=$10$40$140=$35.00
For Product Z: