Answer:
d) $13
Explanation:
contribution margin per unit:
contribution margin per machine hour:
the company should first produce 800 units of product D and use 1,000 machine hours. Then it should produce 680 units of product B using 1,700 machine hours. In order to produce the remaining 20 units of product B and the 600 units of product C, the company must rent machine hours and the maximum possible price per hour is $13 (contribution margin per machine hour product C).
The company should be willing to pay d) $13 per hour to lease additional machine capacity.
Data and Calculations:
Product B Product C Product D Total
Estimated customer demand in units 700 600 800
Selling price per unit $ 80 $ 65 $ 45
Variable cost per unit $ 35 $ 26 $ 20
Contribution margin per unit $45 $39 $25
Machine-hours per unit 2.5 3.0 1.25
Contribution margin per MH $18 $13 $20
Total machine hours required 1,750 1,800 1,000 4,550 hours
Available machine-hours capacity = 2,700 hours
Machine hours to lease = 1,850 hours
Order of Production with own resources:
Product D's 800 units at 1.25 hours per unit = 1,000 hours
Product B's 680 units at 2.5 hours per unit = 1,700 hours
Total machine hours with own resources = 2,700 hours
Lease Machine Capacity:
Product B's 20 units at 2.5 hours per unit = 50 hours
Product C's 600 units at 3 hours per unit = 1,800 hours
Total machine hours required under leasing = 1,850 hours
Thus, the company will be willing to lease machine capacity at $13 per machine hour to produce 20 units of Product B and 600 units of Product C.
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