Question

company manufactures two products, A and B. Both products utilise the same material and require skilled labour. Materials and skilled labour are the only variable costs. Product details are as follows:

                                                              A    B

                                                                             £                             £

Selling price                                                          24                          30

Material costs                                                     5                          10

Skilled labour costs                                             16                          16

      

Materials cost £5 per kg. Skilled labour costs £8 per hour. For the month of May 2020 maximum expected demand is for 1,000 units of A and 1,500 units of B. In May 2020 there is expected to be a restriction on the availability of both material and skilled labour. There are 4,500 kgs. of Material available and 4,500 hours of skilled labour.

To maximise expected contribution how much A and B should be produced?

A.

1,000 A

1,250 B

B.

750 A

1,500 B

C.

1,000 A

1,500 B

D.

none of the

Answer 1

in the question limiting factor is direct labor hours because hours required = Hours required for A + Hours required B

Hours required for A + Hours required B

1000 * 2 + 1500 * 2 = 5000 Hours

so we have to allocate the labor hours by contribution margin per hour

Hours used by Product B = 1500 Units *2 = 3000 Hours

Hours available to Product A = (4500 - 3000) / 2 = 750 Units

Thus Option B. 750 A 1,500 B

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