Business – 5.4 Costs – Uses of cost information | e-Consult
5.4 Costs – Uses of cost information (1 questions)
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Model Answer:
- Calculate contribution per machine hour for each product:
- Product A: \$30 ÷ 3 h = \$10 per hour
- Product B: \$45 ÷ 5 h = \$9 per hour
- Product C: \$25 ÷ 2 h = \$12.50 per hour
- Rank products by contribution per hour (highest to lowest): C (\$12.50), A (\$10), B ($9).
- Allocate the 2,000 machine hours starting with the highest contributor:
- Produce as many units of C as possible: each unit uses 2 h → 2,000 h ÷ 2 h = 1,000 units of C.
- All machine time is exhausted, so no capacity remains for A or B.
- Total contribution from the special order:
- Contribution = 1,000 units × \$25 = \$25,000
- Conclusion: To maximise contribution, the firm should produce 1,000 units of Product C and use the entire 2,000 machine‑hour capacity for that product.