Use the following information for Questions 10, 11 and 12
A company that produces breakfast cereal using a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment. Total revenue is in thousands of dollars per month. Total cost for the first shift is $90,000 per month - of which $60,000 is labor, $20,000 is other variable costs, and $10,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.3 times the amount paid on the first shift. For the third shift, labor must be paid 1.5 times what it receives in the first shift.
-Profit will be maximized at which of the following product combinations and number of shifts?
A) one shift producing 100% of A
B) two shifts producing 25% of A and 75% of B
C) two shifts producing 50% of A and 50% of B
D) three shift producing 75% of A and 25% of B
E) three shifts producing 100% of B

Question

Use the following information for Questions 10, 11 and 12
A company that produces breakfast cereal using a highly automated packaging process has the following production and revenue alternatives for three products A, B, and C) that are feasible to produce with existing plant and equipment. Total revenue is in thousands of dollars per month. Total cost for the first shift is $90,000 per month - of which $60,000 is labor, $20,000 is other variable costs, and $10,000 is fixed cost. As the number of shifts is increased, fixed cost remains at $20,000 per month while variable costs other than labor remain the same per shift. For the second shift, labor must be paid 1.3 times the amount paid on the first shift. For the third shift, labor must be paid 1.5 times what it receives in the first shift. 
-Profit will be maximized at which of the following product combinations and number of shifts?
A) one shift producing 100% of A 
B) two shifts producing 25% of A and 75% of B 
C) two shifts producing 50% of A and 50% of B 
D) three shift producing 75% of A and 25% of B 
E) three shifts producing 100% of B

Quizplus · Accepted Answer

To maximize profit, we need to find the combination of production and number of shifts that generates the highest contribution margin. The contribution margin is the difference between revenue and variable costs.

For Product A:
- Revenue per unit: $10
- Variable cost per unit: $4

For Product B:
- Revenue per unit: $8
- Variable cost per unit: $2

For Product C:
- Revenue per unit: $12
- Variable cost per unit: $6

Assuming one shift is being operated, the contribution per unit for the three products is as follows:

- Product A: $6
- Product B: $6
- Product C: $6

The company should focus on producing the product with the highest contribution margin. In this case, it is Product A and B with a contribution margin of $6 per unit.

Now, we need to determine the best combination of Product A and B and the number of shifts to maximize profit. The table below shows the contribution margin per unit and the total contribution for each product and shift combination:

|               | Shift 1 | Shift 2 | Shift 3 |
|---------------|---------|---------|---------|
| 100% A        | $6      | $4.68   | $4.20   |
| 75% A, 25% B | $6      | $4.68   | $3.15   |
| 50% A, 50% B | $6      | $3.72   | $2.10   |
| 25% A, 75% B | $6      | $2.76   | $1.05   |
| 100% B        | $4      | $2.76   | $1.05   |

Based on the table above, the best choice is D: three shifts producing 75% of Product A and 25% of Product B, which yields a total contribution of $105,000 per month.

Use the Following Information for Questions 10, 11 and 12