Question

If demand exceeds the available capacity, in what sequence should orders be filled to maximize the company's profits?

WJE Company has only 4,000 machine hours available each month. The following information on the company's three products is available:
Product AA Product BB Product CC
Contribution margin per unit £10 £13 £5
Machine hours per unit 2 1.5 0.5
a.Product AA first, Product BB second, and Product CC third
b.Product BB first, Product AA second, and Product CC third
c.Product CC first, Product BB second, and Product AA third
d.Product CC first, Product AA second, and Product BB third

Answer 1

The company should fill orders for Product CC first, then Product BB, followed by Product AA, as this sequence maximizes profits by prioritizing products with the highest contribution margin per machine hour.

Step-by-step explanation:

If demand exceeds the available capacity, the sequence in which orders should be filled to maximize the company's profits is by producing the product with the highest contribution margin per machine hour first.

To determine this, we calculate the contribution margin per machine hour for each product which is the contribution margin per unit divided by the machine hours per unit.

For Product AA, it's £10 / 2 hours = £5 per machine hour. For Product BB, it's £13 / 1.5 hours = £8.67 per machine hour. For Product CC, it's £5 / 0.5 hours = £10 per machine hour. Therefore, the company should fill orders for Product CC first, Product BB second, and Product AA last.

Answer: c. Product CC first, Product BB second, and Product AA third