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Widgeon Co. manufactures three products: Bales, Tales, and Wales. The selling prices are $55, $78, and $32, respectively. The variable costs for each product are $20, $50, and $15, respectively. Each product must go through the same processing in a machine that is limited to 2,000 hours per month. Bales take 5 hours to process; Tales 7 hours; and Wales 1 hour.
Which product has the highest contribution margin per machine hour?

a. Bales
b. Tales
c. Bales and Tales have the same
d. Wales

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Answer:

Option D

Wales

Explanation:

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 the highest contribution per unit of the scare resource

The contribution per unit = selling  price - unit variable cost

Bales- 55- 20= 35  per unit

Tales-  78- 50 = 28  per unit

Wales - 32- 15 = 17  per unit

Contribution per hour = contribution per unit/machine hour required

Product        Cont/unit      machine hr /unit      cont/hr     Ranking

Bales                 35                   5                         7                   2nd

Tales                 28                 7                          4                    3rd

Wales                17                  1                            17                   1st              

Note that the contribution per machine is arrived as contribution per unit divided machine hours required per product.

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