Managerial Accounting

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Product Mix Decision Capacity Constraing


Capacity constraints, product mix
Bailey Company produces two kinds of paper shredders, Cross Cut that cuts up to three sheets of paper at a time and Micro Cut that cuts up to 15 sheets of paper at a time in the smallest size cut The selling prices, costs and contribution margins are as follows

Cross Cut Micro Cut
Sales Price per Shredder \$80 \$100
Variable Cost per Shredder \$50 \$60
Contribution Margin per Shredder \$30 \$40
Machine Hours required per Shredder 1 2

The capacity constraint is that only 300 machine hours are available daily for producing shredders at a total fixed cost of $6,000 daily. Assume that demand is high for both products, thus all units produced can be sold.

What relevant factors should be considered in maximizing operating income?


Variable costs and fixed costs per unit.


Variable costs per unit only.


Contribution margin per hour.


Contribution margin per unit.