Question

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company's productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

Produce only Product A.
Produce only Product B.
Produce equal amounts of A and B.
Produce A and B in the ratio of 62.5% A to 37.5% B.
Produce A and B in the ratio of 40% A and 60% B.

Answer 1

Produce only Product B.

Explanation:

The contribution margin per machine hour for product A is ...

($16 -$6)/(5 hour) = $2 per hour

The contribution margin per machine hour for product B is ...

($12 -$5)/(3 hour) ≈ $2.33 per hour

The company should produce the maximum possible number of the product that contributes the most per machine hour: Product B.