A company can sell all the units it can produce of either Product A or Product B but not both. Product A has a unit contribution margin of $8 and takes two machine hours to make and Product B has a unit contribution margin of $21.0 and takes three machine hours to make. If there are 5000 machine hours available to manufacture a product, income will be:

Total income = $35,000

Explanation:

Limiting factor analysis

the company is faced with a limiting factor situation.

Here the  business is faced with a problem of shortage of a resource i.e machine hours which can be used to produced more than one product type.

To maximize the use of the resource , the business should allocate the limited resource for production purpose in such a way that it maximizes the contribution per unit of the scare resource.

Therefore, the Company should allocate the machine hours to maximise the contribution per unit of oven hour. This is done as follows:

Step 1

Calculate he contribution per machine hour and rank the product

cont/hr ranking

Product A $8/2 hours = $4 per hour  (2nd ranking)

Product B   $21/3 hours = $7 per hour  (1st  ranking)

Product B generates a higher contribution per machine hour , therefore  the company should allocate all the machine  hours to product B

Step 2

Calculate the Total contribution from the production of product B

Total contribution margin = $7 per hour s × 5,000 hours

= $35,000

$35,000

Explanation:

Income from product A = ($8 ÷ 2) × 5,000 = $4 × 5,000 = $20,000

Income from product B = ($21 ÷ 3) × 5,000 = $7 × 5,000 = $35,000

Since $35,000 income from product B is $15,000 higher than $20,000 from product A, product B will be produced and income will be $35,000.