Question

A company produces two products, A and B. It has limited capacity but unlimited demand so it can sell as many of either product as it produces. Product A requires 2 machine hours per unit to produce, and Product B requires 1 machine hour to produce. Product A sells for $6 per unit and has variable costs of $2 per unit; Product B sells for $5 per unit and has variable costs of $2 per unit. What is the most profitable sales mix for the company?

Answer 1

Answer:

The company should use all of its limited machine hour to produce only product B. This  will make it maximize profit

Explanation:

Whenever a company is faced with a limiting factor i.e a resource in short supply, the company should allocate the resource to the product with he highest contribution per unit of the scare resource

Product               Cont/unit         machine hr /unit       cont/hr     Ranking

A                 6-2 = $4 per unit        2 hours              $2 per hour    2nd  

B                  5-2 = $3 per unit       1 hour                 $3 per hour    1st

The company should use all of its limited machine hour to produce only product B. This will make it maximize profit