Atuso, Inc. produces three products. Data concerning the selling prices and unit costs of the three products appear below: Product J1 K2 L3Selling price$80 $60 $90 Variable costs$50 $40 $55 Fixed costs$25 $8 $22 Grinding machine time (minutes) 10 5 7 Fixed costs are applied to the products on the basis of direct labor hours.Demand for the three products exceeds the company's productive capacity. The grinding machine is the constraint, with only 2,400 minutes of grinding machine time available this week.Required:a. Given the grinding machine constraint, which product should be emphasized? Support your answer with appropriate calculations.b. Assuming that there is still unfilled demand for the product that the company should emphasize in part (a) above,
up to how much should the company be willing to pay for an additional hour of grinding machine time?
What will be an ideal response?
a.
The product to emphasize can be determined by computing the contribution margin per unit of the scarce resource, which in this case is grinding machine time.
| J1 | K2 | L3 | |||||||||
| Selling price | $ | 80 | $ | 60 | $ | 90 | |||||
| Variable costs | 50 | 40 | 55 | ||||||||
| Contribution margin | $ | 30 | $ | 20 | $ | 35 | |||||
| Grinding machine time (minutes) | 10 | 5 | 7 | ||||||||
| Contribution margin per minute | $ | 3 | $ | 4 | $ | 5 | |||||
b.
If additional grinding machine time would be used to produce more of Product L3, the time would be worth 60 × $5 = $300 per hour.
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