Rexford Corporation produces three products, with costs and selling prices as follows: Product A Product B Product C Machine hours per unit 3 1 2
Maximum demand 500 units
Selling price per unit $30 $20 $15
Variable costs per unit $18 $15 $ 6
Contribution Margin per unit $12 $ 5 $ 9
Machining is the bottleneck. The total machine time available is 2,100 hours. What is the maximum contribution margin that Rexford can earn by optimal use of the constrained resource?

$9,400

Explanation:

For computing the maximum contribution margin we need to do following calculations

Contribution Margin

Product A = ($12 ÷3) = 4

Product B = ($5 ÷ 1) = 5

Product C = ($9 ÷ 2) = 4.50

So, the ranking order would be product B > product C > product A

Now

Total machine hours available = 2,100 hours

And,

Time for making 500 units of B

= 500 × 1

= 500 hours

For making 500 units of C, the time taken is  

= 500 × 2

= 1000 hours

So the remaining hours left is

= 2,100 hours - 1,000 hours - 500 hours

= 600 hours  

So, for A the manufactured is

= 600 ÷ 3

= 200

And, finally the Maximum contribution margin  is

= (200 × $12) + (500 × 5) + (500 × 9)

= $2,400 + $2,500 + $4,500

= $9,400

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