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Situation Three


Corp. makes three products in a single facility. These products have the following unit product costs:

                                                                   Product A              Product B                  Product C

Direct material                                               $40.00                        $35.00                        $38.00

Direct labor                                                     21.00                         18.50                         17.50

Variable manufacturing overhead                     5.50                           7.00                         11.00

Fixed manufacturing overhead                        35.00                           36.00                        31.00    

Unit cost                                                     $101.50                        $96.50                       $97.50


Additional data concerning these products are listed below:

                                                                   Product A                Product B           Product C

Mixing minutes per unit                                   5.5                              3.5                    5.0

Selling price per unit                                    $135.00                  $122.00                 128.00

Variable selling cost per unit                            $9.50                       $7.00                   $8.75

 Monthly demand in units                               2,400                        4,900                   4,200

The mixing machines are potentially the constraint in the production facility. A total of 47,000 minutes are available per month on these machines.

Direct labor is a variable cost in this company.


  • How many minutes of mixing machine time would be required to satisfy demand for all three products?

Minutes for Product A


Minutes for Product B


Minutes for Product C


Total Minutes

51,350 minutes

  • What is the contribution margin per minute individually for Products A, B, and C?

Product A

Product B

Product C

$135-$66.50= $68.50



$122-$60.50= $61.50






  • Using only the available 47,000 minutes of machine time, how much of each product should be produced to maximize net operating income? (Round down to the nearest whole units.)

4,900*3.5 = 17,150; 47,000-17,150= 29,850 remaining

2,400*5.5= 13,200; 29,850-13,200 = 16,650 remaining

16,650/5.0 = 3,330

Product A

4,900 units

Product B

2,400 units

Product C

3,330 units

  • Is there unmet demand for product(s)? If so, how much and for which product(s)?

There is an unmet demand for product C. 4,200 -3.330= 870 units

  • Assume there is unmet product demand. How much in total should Dweeb be willing to pay for additional machine time?

870*61.50= $53,505


1)Did variable selling cost per unit figure into any of your calculations? Which ones, if any?

2) Is there anything misleading about the figure given for fixed manufacturing overhead?

3) What is the significance of contribution margins with respect to determining how much of each product to produce to maximize profit?

4) What is the significance of contribution margins with respect to determining how much Dweeb should pay for additional machine time?

5)Why isn't sales price or the difference between sales prices and the unit costs stated in the problem the best predictor of the priority in producing the products?


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