A company has 10,000 hours of capacity and manufactures two products.Product 1 takes 2 hours per unit.Product 2 takes 3 hours per unit.The contribution margin per unit for Product 1 is $5.The contribution margin per unit for Product 2 is $6.Neither product has enough demand to use all of the plant capacity,but the demand for both products exceeds the plant capacity.Which product or products should be manufactured?
A) 5,000 units of Product 1 and 0 units of Product 2
B) 0 units of Product 1 and 5,000 units of Product 2
C) make Product 1 first until meet customer demand, then make Product 2
D) make Product 2 first until meet customer demand, then make Product 1

Question

Quizplus · Accepted Answer

If Product 1 takes 2 hours per unit, then the plant could produce 5,000 units of Product 1 (10,000 hours ÷ 2 hours per unit). Similarly, if Product 2 takes 3 hours per unit, then the plant could produce 3,333 units of Product 2 (10,000 hours ÷ 3 hours per unit).

Given that both products have demand that exceeds plant capacity, it is best to first make Product 1 until customer demand is met, before switching to Product 2. This is because Product 1 has a higher contribution margin per unit ($5 compared to $6 for Product 2), so by making and selling more units of Product 1, the company can generate greater profit. Therefore, the best choice is to make 5,000 units of Product 1 and 0 units of Product 2.

A Company Has 10,000 Hours of Capacity and Manufactures Two