ABC Pasta Company makes three types of pasta: spaghetti, elbows, and shells. The production process involves mixing, extruding, and drying. The drying operation is a constraining resource in this operation. The contribution margins per unit for the three products are shown below.
Spaghetti Elbows Shells
Sales price per unit 20 30 35
Variable cost per unit 15 18 20
Contribution margin per unit 5 12 15
The fixed costs are P100,000. The production volume and constraint usage information for the three products are:
Spaghetti Elbows Shells
Drying hours per unit 0.50 0.25 0.10
Units produced (prior year) 8,000.00 4,000.00 2,000.00
The following profitability report has been prepared for the prior year’s sales levels:
Spaghetti Elbows Shells TOTAL
Units of production 8,000.00 4,000.00 2,000.00 14,000.00
Revenues 200,000.00 120,000.00 70,000.00 390,000.00
Less variable costs 120,000.00 72,000.00 40,000.00 232,000.00
Contribution margin 80,000.00 48,000.00 30,000.00 158,000.00
Less fixed costs 100,000.00
Profit 58,000.00
1. If, during the upcoming year, ABC reduced spaghetti production by 2,000 units and replaced the released capacity with the sale of shells, what would be the impact on total profitability? 2. Assuming the units produced last year is also the quantity demanded next year and there are only 5,000 drying hours available next year. However, the company can outsource the drying operation to another company.
2. What is the maximum amount ABC Pasta should pay per machine hour of drying operation?