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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Use the following information for Exercises 8-47 and 8-48:

Billings Company produces two products, Product Reno and Product Tahoe. Each product goes through its own assembly and finishing departments. However, both of them must go through the painting department. The painting department has capacity of 2,460 hours per year. Product Reno has a unit contribution margin of $120 and requires 5 hours of painting department time. Product Tahoe has a unit contribution margin of $75 and requires 3 hours of painting department time. There are no other constraints.

8-47 Choosing the Optimal Product Mix with One Constrained Resource

Refer to the information for Billings Company above.

Required:

  1. 1. What is the contribution margin per hour of painting department time for each product?
  2. 2. What is the optimal mix of products?
  3. 3. What is the total contribution margin earned for the optimal mix?

1.

To determine

Calculate the contribution margin per hour of painting department time for each type of product.

Explanation

Contribution Margin:

Contribution margin can be defined as the amount of difference between sales revenue and the variable expense. It means the amount of sales left after covering variable expenses.

The following table represents the contribution margin per painting department time for each type of products:

 Reno ($)Tahoe ($)
Contribution margin per unit12075
Required painting department hours53
Contribution margin per machine hours12425

Table (1)

Therefore, the contribution margin per painting department time for Reno and Tahoe are $24 and $25 respectively.

Working Notes:

1. Calculation of contribution margin per painting department time for Reno:

Contribution margin per painting department time=Contribution

2.

To determine

Calculate the optimal mix of the products.

3.

To determine

Calculate the contribution margin earned for the optimal mix.

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