Question
In: Accounting
Happy Pharmaceuticals produces three products using one machine. The machine has a total capacity of 200 machine hours.
Happy Pharmaceuticals produces three products using one machine. The machine has a total capacity of 200 machine hours. Product A sells for $13 per unit, has a variable cost per unit of $11, and each unit takes 1 machine hour to produce. Product A’s market demand is 150 units per week. Product B sells for $25 per unit, has a variable cost per unit of $15, and each unit takes 2 machine hours to produce. Product B’s market demand is 50 units per week. Product C sells for $3 per unit, has a variable cost per unit of $1, and each unit takes 0.8 machine hour to produce. Product C’s market demand is 200 units per week.
a) How many units of product C should the firm produce?
b) What is the maximum contribution margin the firm can achieve?
c) What is the maximum the firm should pay to increase its capacity by 200 machine hours?
Solutions
Expert Solution
a)The firm should produce that product which provide highest contribution per machine hour.
| Product | Contribution | MH per unit | contribution per Mh | MHs used |
| A | $13-11=2 | 1 | 2 | |
| B | 25-15=10 | 2 | 5 | 50 units *2=100 MHs |
| C | 3-1=2 | 0.8 | 2.5 | 100 MHs /0.8=125 units |
So, firm will produce 125 units per week of Product C.
b) The maximum contribution the firm can achieve = 50*10 + 125*2=$750
c) Maximum the firm should pay to increase its capacity by 200 MHs
= 75*2 (ie. 60 MHs) +140*2 (ie. 140 MHs) = $430
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