Elite Company has unlimited demand for either Candy Coin or Candy Bars. However, they have a limited capacity of machine hours to produce either product. Candy Coins sells for $10 per unit, has a variable cost of $6 per unit and it takes 6 minutes to produce one unit. Candy Bars sells for $15 per unit, has a variable cost of $3 per unit and it takes 10 minutes to produce one unit. Which of the following decisions would maximize Elite's net income?

Question

Quizplus · Accepted Answer

To maximize net income, calculate the contribution margin per minute for each product. Candy Coins have a contribution margin of $4 per unit ($10 - $6) and take 6 minutes to produce, resulting in a contribution margin per minute of $0.67 ($4/6). Candy Bars have a contribution margin of $12 per unit ($15 - $3) and take 10 minutes to produce, resulting in a contribution margin per minute of $1.20 ($12/10). Since Candy Bars have a higher contribution margin per minute, allocating all machine hours to Candy Bars would maximize Elite's net income.

Elite Company Has Unlimited Demand for Either Candy Coin or Candy