Question

In: Accounting

Product A sells for $24.00 per unit and its variable cost is $20.00 per unit. Product...

Product A sells for $24.00 per unit and its variable cost is $20.00 per unit. Product B sells for $30.00 per unit and its variable cost is $22.80 per unit. Both products use the same machines. A total of 204,000 machine hours are available each year. Product A requires 1.0 machine hour (MH) while Product B requires 1.5 MHs. The market demand for Product A is 100,000 units and the market demand for Product B is 70,000 units. The company should manufacture:

a.99,000 units of Product A and 70,000 units of Product B.

b.204,000 units of Product A and 0 units of Product B.

c.100,000 units of Product A and 69,333 units of Product B.

d.39,000 units of Product A and 110,000 units of Product B.

Expert Solution

Contribution margin per unit of Product A = Sales price - Variable cost

= $24.00 - $20.00

= $4.00

Contribution margin per unit of Product B = Sales price - Variable cost

= $30.00 - $22.80

= $7.20

Contribution margin per Machine hour of product A = Contribution margin per unit / Machine hours per unit

= $4.00 / 1.0

= $4.00

Contribution margin per machine hour of Product B = $7.20 / 1.5

= $4.80

Since the contribution margin per machine hour of Product B is more than the contribution margin per machine hour of Product A.

Therefore company should manufacture all units of Product B and remaining units of Product A.

Product B units = 70,000 units

Machine hours required for Product B = 70,000 * 1.50 hours

= 105,000 hours

Remaining machine hours = 204,000 - 105,000

= 99,000 hours

Product A units = 99,000 hours / 1.0 hours

= 99,000 units

99,000 units of Product A and 70,000 units of Product B, company should manufacture.

ekkarill92 answered 2 years ago

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