Answer:
The answers are:
a. product A is more profitable
b. Effective capacities (units per day): Product A = 54 units, Product B = 18 units
c. the financial capacity (profit per day) = $1,710
Explanation:
a. To calculate the profit, we have to first define the term contribution margin; it refers to the net price sold on the unit of a product after variable costs have been deducted. It can be said to be the profit made on each unit of a product.
Now, we are told that Product A takes 10 minutes to produce, and its contribution margin is $20, meaning that for every 10 minutes of labor input, $20 profit is realized. the same explanation holds for product B which has a contribution margin of $35 and unit load is 20 minutes.
To get the profitable product, we will first calculate the contribution margin for 1 minute for each product;
Product A;
10 minutes = $20
∴ 1 minute = 20 ÷ 10 = $2 ( for every 1 minute of labor input $2 is made)
Product B;
20 minutes = $35
∴ 1 minute = 35 ÷ 20 = $1.75 (for every 1 minute of labor input $1.75 is made)
since more money is made o product A for every 1 minute labor input, it has more profit
b. Total minute per day = 900
Note that product A is set at 60%, meaning that out of this 900 minutes, product A will take 60%, therefore, 60% of 900 = 60/100×900
= 0.6 ×900 = 540 minutes, so product A will take up 540 minutes in a day
Product B is set at 40%, since we know that product A will take 540 out of 900 minutes, we can calculate the number of minutes for product B as;
900 - 540 =360 minutes.
Therefore product A = 540 minutes per day
product B = 360 minutes per day
Effective capacity or units produced per day is calculated thus;
Product A,
10 minutes = 1 unit (unit load, given)
∴ 540 minutes = (1 ÷ 10) × 540 = 54 units per day
Product B;
20 minutes = 1 unit
∴ 360 minutes = (1 ÷ 20 ) × 360 = 18 units per day.
c. Profits per day using number of units calculated in b above
Product A;
1 unit = $20 (given)
∴ 54 units = 20 × 54 = $1,080 profit per day
Product B;
1 unit = $35
∴ 18 units = 35 × 18 = $630 profit per day
Therefore total profit per day = $1,080 + $630 = $1,710
