Question

Table 6

Easy Cook Company manufactures two products: toaster ovens and bread machines. The following data are available:

Toaster Ovens Bread Machines

Sale price $60 $135

Variable costs 38 62

The company can manufacture five toaster ovens per machine hour and three bread ovens per machine hour. The company’s production capacity is 1,500 machine hours per month.

Refer to Table 6. To maximize profits, the company should produce ________.

Answer 1

• When resources are LIMITED (as in this question machine hours are limited), that product will be produced that will earn MAXIMUM CONTRIBUTION MARGIN per unit of that limited resources.
• IN out case, that product will be produced, the contribution margin per machine hour of whom is MORE than the other.
• Working

Working		Toaster Ovens	Bread Machines
A	Sales Price	$                         60.00	$                135.00
B	Variable Cost	$                         38.00	$                  62.00
C = A - B	Contribution margin per unit	$                         22.00	$                  73.00
D	Machine hours per unit	0.2 [1 hr/5 units]	0.333333333 [ 1 hr/3 units]
E = C/D	Contribution margin per machine hours	$                       110.00	$                219.00 [Answer, as $ 219 is more than $ 110]

• ANSWER: To maximise profits the company should produce BREAD MACHINES.