Question

A company produces two products. Product A sells for $25, has variable costs of $15, and requires 2 machine hours to produce. Product B sells for $35, has variable costs of $20, and requires 2 machine hours to produce. 40,000 machine hours are available. The company can sell all it can make of either product. Which statement is true? The company should produce 8,000 units of Product A and 4,800 units of Product B.

Answer 1

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