Polar Company Produces Two Types of Gears,Simple Gears and Deluxe

question 22

Essay

Polar Company produces two types of gears,Simple Gears and Deluxe Gears,with unit contribution margins of $2 and $5,respectively.Each gear must spend time on a special machine.The firm owns 10 machines that together provide 25,000 hours of machine time per year.Each Simple Gear requires 0.10 hours of machine time; each Deluxe Gear requires 0.4 hours of machine time.
A. What is the contribution margin per hour of machine time for each Simple Gear? And for each Deluxe Gear?
B. If Polar faces only the production constraint (25,000 hours of machine time), how many units of Simple Gears should be produced? And how many units of Deluxe Gears? What is the total contribution margin from this product mix?
C. Now suppose that Polar cannot sell more than 200,000 units of each type of gear. How many units of Simple Gears should be produced? And how many units of Deluxe Gears? What is the total contribution margin from this product mix?

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Definitions:

Convertible Bond

A bond which offers the option to be exchanged for a specific number of the issuing company's stock at certain periods throughout its duration, typically at the option of the person holding the bond.

Equity

represents the value of the shares issued by a company, denoting the ownership interest held by shareholders in the corporation.

Call Option

A monetary agreement allowing the possessor the choice, yet not the compulsion, to acquire a stock, bond, commodity, or any other asset for a prearranged price within a set interval.

Out-Of-The-Money

A term used in options trading to describe an option that has no intrinsic value. For a call option, this is when the strike price is above the market price of the underlying asset; for a put option, it's the opposite.