A company sells two products with information as follows:
$$\begin{array} { | l | r | r | }
\hline &{ \text { A } } & { \text { B } } \
\hline \text { Price per unit } & \$ 10.00 & \$ 16.00 \
\hline \text { Variable cost per unit } & \$ 8.00 & \$ 11.00 \
\hline
\end{array}$$
Products are made by machine. 4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour. The company has a maximum of 2,000 machine hours available per month.
- Assume there are no constraints on sales of either product, and the company could choose any product mix they wish. What is the maximum amount of contribution margin that the company could earn in a month?

Question

A company sells two products with information as follows:
$$\begin{array} { | l | r | r | } 
\hline &{ \text { A } } & { \text { B } } \
\hline \text { Price per unit } & \$ 10.00 & \$ 16.00 \
\hline \text { Variable cost per unit } & \$ 8.00 & \$ 11.00 \
\hline
\end{array}$$
Products are made by machine. 4 units of Product A can be made with one machine hour and 2 units of Product B can be made with one machine hour. The company has a maximum of 2,000 machine hours available per month.
- Assume there are no constraints on sales of either product, and the company could choose any product mix they wish. What is the maximum amount of contribution margin that the company could earn in a month?

Quizplus · Accepted Answer

The contribution margin per unit for Product A is $2 ($10 - $8), and for Product B is $5 ($16 - $11). Product A yields $8 per machine hour (4 units x $2), and Product B yields $10 per machine hour (2 units x $5). To maximize contribution margin, the company should produce only Product B, resulting in $20,000 (2,000 hours x $10).

A Company Sells Two Products with Information as Follows Products Are Made by Machine