How to Optimize Total Contribution Margin for Connolly Company
How many of each type of lamp must be sold to optimize total contribution margin?
a. 90,000 classic lamps; 0 fancy lamps
b. 0 classic lamps; 9,000 fancy lamps
c. 18,000 classic lamps; 0 fancy lamps
d. 0 classic lamps; 30,000 fancy lamps
e. 10,000 classic lamps; 10,000 fancy lamps
Answer:
a. 90,000 classic lamps; 0 fancy lamps
In order to optimize the total contribution margin for Connolly Company, we need to calculate the contribution margin per hour of machine time for both the classic and fancy lamps.
The contribution margin per hour of machine time for the classic lamp is $65 (=$13 / 0.2), while for the fancy lamp it is $42 (=$21 / 0.5). Since the classic lamp has a higher contribution margin per hour, it is more profitable to produce.
Given that the company has 18,000 machine hours available, all these hours will be used to produce classic lamps in order to maximize the total contribution margin. Therefore, the company should sell 90,000 classic lamps and no fancy lamps.
By selling 90,000 classic lamps, the company can achieve a total contribution margin of $1,170,000, making it the optimal choice for maximizing profits.