Question

A company produces two products. Product A sells for $25, has variable costs of $15, requires 2 machine hours to produce, and the market is limited to 8,000 units. Product B sells for $35, has variable costs of $20, requires 5 machine hours to produce, and the market is limited to 6,000 units. 40,000 machine hours are available. Which statement is true?

a. The company should produce 8,000 units of Product A and 4,800 units of Products
b. The company should produce 6,000 units of Product B and 5.000 units of Product A
c. The best sales mix cannot be determined from the information given.
d. The company should produce 4,000 units of Product A and 3,000 units of Product B.

Answer 1

The company should maximize its profits by prioritizing the product with the higher contribution margin per machine hour. Therefore, it should produce 8,000 units of Product A and 4,800 units of Product B, given the contribution margins and machine hour constraints.

Step-by-step explanation:

The question relates to determining the optimal production mix of two products given the constraints on selling price, variable costs, production time, and market demand. We need to maximize profit within the limited number of machine hours available.

To do this, we calculate the contribution margin per machine hour for both products (contribution margin divided by machine hours required). Product A has a contribution margin (selling price - variable costs) of $25 - $15 = $10, and requires 2 machine hours, resulting in $10 / 2 = $5 per machine hour. Product B has a contribution margin of $35 - $20 = $15, and requires 5 machine hours, resulting in $15 / 5 = $3 per machine hour.

Given that Product A has a higher contribution margin per machine hour, the company should prioritize the production of Product A until its market limit is reached.

With 8,000 units of Product A at 2 machine hours each, that would total 16,000 machine hours, leaving 24,000 hours for Product B. At 5 machine hours per unit, the company can produce 24,000 / 5 = 4,800 units of Product B. Therefore, the correct statement is a. The company should produce 8,000 units of Product A and 4,800 units of Product B.