Question

The Kitchen Company makes toaster ovens and bread machines. Toaster ovens Sales price per unit: $60 Variable costs per unit: $38 Machine hours required per unit: 1 hr Bread machines Sales price per unit: $135 Variable costs per unit: $75 Machine hours required per unit: 2 hrs Machine hours is the limited resource. The company's production capacity is 15,000 machine hours. To maximize profits, the Kitchen Company should produce:

Answer 1

Answer:

The company should produce 7,500 bread machines to maximize profit

Explanation:

Given:

                                                                      Toaster Ovens Bread Machines

         Sales Price per unit                                     60                           135

Less: variable cost per unit                                   38                           75

Contribution Margin per unit                                22                           60

Machine hours per unit                                            1                           2

Now,

Contribution Margin per Machine Hour = $\frac{\textup{Contribution Margin per unit}}{\textup{Machine hours per unit}}$

thus,

Contribution Margin per Machine Hour        22                           30

Since,

The Contribution Margin per Machine Hour for the bread is more, therefore to maximize profits the kitchen company should produce Breads machines.

also,

Number of units to be produced = $\frac{\textup{Machine hours}}{\textup{Machine hours required}}$

= $\frac{\textup{15,000}}{\textup{2}}$

= 7,500 units