Correct 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 limites 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. What should the company produce of Product A and B?
Answer:
8000 units of product A and 4,800 units of product B should be produced.
Explanation:
Product A sells for $25 but cost $15 to produce. It means there is a contribution margin of $10 per unit (i.e $25-$15)
since it takes 2hours to produce product A we have 10/2= 5 products per machine hour.
$10 × 8000 units = $80,000 (in profits)
on the other hand, if product B is to be sold at $35 per unit but has a production cost of $20, it means a contribution margin of $15(i.e $35-$20) is embedded in each $35 sale. If the company produces 4,800 units of this product B, it means that the company has
$15 × 4,800 units = $72, 000
Since the aim of the company's production is to make profit, it is very clear that product A should be produced compared to product B because it has a higher contribution margin
