Question

Logan Company can sell all of its products A and Z that it can produce, but it has limited production capacity. It can produce 8 units of A per hour or 10 units of Z per hour, and it has 20,000 production hours available. Contribution margin per unit is $12 for A and $10 for Z. What is the most profitable sales mix for Elliot Company?
A. 84,000 units of A and 60,000 units of Z.
B. 48,000 units of A and 80,000 units of Z.
C. 60,000 units of A and 100,000 units of Z.
D. 120,000 units of A and 0 units of Z.
E. 0 units of A and 200,000 units of Z.

Answer 1

Answer:

E) 0 units of A and 200,000 units of Z.

Explanation:

In order to estimate the profit maximizing sales mix we first calculate the contribution per product per limiting factor. Limiting factor in this case is the labor hours.

So,

Contribution per hour if A is made = 8 * 12 = $96

Contribution per hour if Z is made = 10 * 10 = $100,

Therefore Z holds priority,

Since there is no sales mix we need to follow we can just make Z for maximizing profits and as such We make 20000 * 10 = 200,000 units of Z and 0 units of A.

Hope that helps.