Question

TOM, Inc. produces and sells two products, L and V.

Revenue and cost information for the two products from last

month appear below:

Product L Product V

selling price per unit ........... $15.00 $12.00

variable costs per unit .......... $ 8.00 $ 7.00

For the coming month, Betty would like to use linear programming

in order to maximize monthly profits.

Each month Betty has 80,000 direct labor hours available and 60,000

machine hours available. Product L requires 5 direct labor hours for

each unit and 2 machine hours for each unit. Product V requires 4

direct labor hours for each unit and 8 machine hours for each unit.

Calculate the number of units of Product L that should be produced

in order to maximize net income.

Answer 1

Product L

Contribution margin = Selling price - variable cost

= 15 - 12

= $3

Contribution margin per direct labour hour

= 3/5

= $0.60

Contribution margin per machine hour

= 3/2

= $1.50

Product V

Contribution margin

= 8 - 7

= $1

Contribution margin per direct labour hour

= 1/4

= $0.25

Contribution margin per machine hour

= 1/8

= $0.125

As the contribution margin per direct labour hours and per machine hour is higher in product L therefore total production will be of Product L

Total units to be produced

Total direct labour hours = 80,000

Units that can be produced by direct labour hours

= 80,000/5

= 16,000

Total machine hours = 60,000

Units that can be produced by machine hours

= 60,000/2

= 30,000 units.

As the units that can be produced by direct labour hours is lower than machine hours therefore 16,000 units should be produced to maximize the profit . Because to produce 30,000 units we have machine hour but not sufficient labour hours.

Therefore the correct answer is 16,000 units.