Question

Product A is sold at $115 and Product B is sold at $145. To produce one unit of Product A, it costs the company a total of $75. Also, to produce one unit of Product B, it costs the company a total of $85. In the last year, XYZ Co.'s total cost of production was $80,000.

During the next year, it is expected that the company will only have 45,000 hours of production time available, while all other production factors remain the same. Product A requires 12 hours to produce one unit, and Product B takes double the time that of Product A to produce one unit.
XYZ Co. would like to draw a production plan in which the profits would be maximized for the upcoming year.

Answer 1

The production plan that maximizes profits for the upcoming year is to produce 3,750 units of Product A and 1,875 units of Product B.

Step-by-step explanation:

To maximize profits for the upcoming year, XYZ Co. should determine the optimal quantities to produce for both Product A and Product B. Here's how:

1. Calculate the contribution margin per unit for each product by subtracting the production cost per unit from the selling price per unit. For Product A, the contribution margin is $115 - $75 = $40, and for Product B, it is $145 - $85 = $60.
2. Calculate the time required to produce one unit of each product. Product A requires 12 hours, and Product B requires double that, which is 24 hours.
3. Calculate the number of units of each product that can be produced within the available production time of 45,000 hours. For Product A, divide 45,000 by 12 to get 3,750 units. For Product B, divide 45,000 by 24 to get 1,875 units.
4. Multiply the contribution margin per unit by the number of units produced for each product to calculate the total contribution margin. For Product A, the total contribution margin is $40 * 3,750 = $150,000. For Product B, it is $60 * 1,875 = $112,500.

The production plan that maximizes profits for the upcoming year is to produce 3,750 units of Product A and 1,875 units of Product B.