Hadlee Corporation produces two products, P and Q. P sells for $9.50 per unit; Q sells for $5.50 per unit. Variable costs for P and Q are $5.00 and $3.00, respectively. There are 3,300 direct labor hours per month available for producing the two products. Product P requires 3.00 direct labor hours per unit, and product Q requires 5.00 direct labor hours per unit. The company can sell up to 900 units of each kind per month. What is the maximum monthly contribution margin that Hadlee can generate under the circumstances? (Round to nearest whole dollar.) A. $14,070 B. $300 C. $4,350 D. $4,050

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hamzatauseef hamzatauseef · Answer 1 · 2019-12-21T10:34:59+01:00

Answer:

C. $4,350

Explanation:

We first calculate contribution per limiting factor to rate priority the products to be produced.

Contribution P = 9.50 - 5 = $4.50

Contribution Q = 5.50 - 3 = $2.50

Labor hours used,

P = 3

Q = 5

Contribution / labor hour

P = 4.50 / 3 = $1.5

Q = 2.50 / 5 = $0.5

We should prioritize production of P first and thus total units produced for P should be 900 using 900*3 = 2700 labor hours.

Q should be produced

Hours available for Q = 3300 - 2700 = 600 hours

Q production = 600/5 = 120 units.

Optimum Contribution =

900 units of P @ 4.50 contribution / unit = $4,050

120 units of Q @ 2.50 contribution / unit = $300

Total Contribution = 4,050 + 300 = $4,350

Hope that helps.