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20 April, 16:08

Excel Memory Company can sell all units of computer memory X and Y that it can produce, but it has limited production capacity. It can produce two units of X per hour or three units of Y per hour, and it has 4,000 production hours available. Contribution margin is $6 for product X and $5 for product Y. Calculate contribution margin per production hour. What is the most profitable sales mix for this Company?

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  1. 20 April, 18:41
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    1. Contribution Margin per production hour

    Product X = $12, Product Y = $15

    2. Allocate all production capacity to product Y to generate $60,000 contribution

    Explanation:

    Step 1: Calculate The Contribution margin Per Production Hour

    Product X,

    = Contribution Margin per unit = $6

    Number of Unit Produced in 1 hour = 2

    Contrbution Per 1 Hour = $6 x 2 = $12

    Product Y,

    = Contribution Margin per unit = $5

    Number of Unit Produced per hour = 3 units

    Contrbution Per Hour = $5 x 3 = $15

    Step 2: Calculate the Most Profitable Sales Mix

    Option 1: Allocate all production capacity to product x

    Number of Hours available = 4000 hours

    Total Contribution = Contribution on hourly basis x total number of hours

    Total Contribution = 12 x 4000 = $48,000

    Option 2: Allocate all production capacity to product Y

    Number of Hours available = 4000 hours

    Total Contribution = Contribution on hourly basis x total number of hours

    Total Contribution = 15 x 4000 = $60,000

    Option 3: Allocate 40% of Capacity to Product X

    Hours of total hours for product X = 40% x 4000 = 1600

    Hours of toal hours for Product Y = 60% x 4000 = 2400

    Contribution therefore:

    X = 12 x 1600 = $19,200

    Y = 15 x 2400 = $36,000

    Total Mix = $55,200

    Option 4: Allocate 24% of Capacity to Product Y

    Hours of total hours for product X = 76% x 4000 = 3040

    Hours of toal hours for Product Y = 24% x 4000 = 960

    Contribution therefore:

    X = 12 x 3040 = $36,480

    Y = 15 x 960 = $14,400

    Total Mix = $50,880

    The Most Profitable Sales Mix is to allocate all Capacity to Product Y to generate $60,000
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