Product Basic Deluxe Basic Deluxe Basic Deluxe Total Basic D

Product

Basic

Deluxe

Basic

Deluxe

Basic

Deluxe

Total

Basic

Deluxe

Total

Helena Company manufactures and sells two products. Relevant per unit data concerning each product follow. Product Basic Deluxe Selling price $42 $52 Variable costs $20.40 $24.80 Machine hours 0.60 0.80

Solution

Contribution margin means how much incremental profit is being added on sale of a single product.
Contribution margin= sales - variable cost

CM for Basic= 42-20.4= 21.6$; CM per hour = 21.6/0.6= 36$
CM for Deluxe= 52-24.8= 27.2$ ; CM per hour = 27.2/8 = 34$

Hence al though the contribution margin for deluxe > basic; the contribution margin per hours is more for basic than deluxe

So if 1010 additional hours are available, Helena should manufacture Basic product.

Now if additional 1010 hours are available and to be
1)

distributed equally then 505 hours for basic and 505 hours for deluxe;
CM per hours for basic= 36$; Hence CM basic for 505 hours = 505*36= 18,180$
CM per hours for deluxe = 34$; Hence CM deluxe for 505 hours = 505*34= 17,170$
Total CM= 35,350$

2) allocated entirely to the above stated product (basic) then
CM basic = 36*1010= 36,360$
CM deluxe= 34*0=0$
Total CM= 36,360$