Lie Around Furniture manufactures two products: Futons and Recliners. The following data are available: The company can manufacture 3 futons per machine hour and 2 recliner per machine hour. The company's production capacity is 3500 machine hours per month.
To maximize profits, what product and how many units should the company produce in a month?
A)7000 recliners
B)10,500 futons and 7000 recliners
C)10,500 futons
D)7000 futons and 6 recliners

Question

Lie Around Furniture manufactures two products: Futons and Recliners. The following data are available:  The company can manufacture 3 futons per machine hour and 2 recliner per machine hour. The company's production capacity is 3500 machine hours per month.
To maximize profits, what product and how many units should the company produce in a month?
A)7000 recliners 
B)10,500 futons and 7000 recliners 
C)10,500 futons 
D)7000 futons and 6 recliners

Quizplus · Accepted Answer

The first step to maximizing profits is to calculate the contribution margin per unit for each product. The contribution margin is the selling price minus the variable cost per unit.

Futon: 
Selling price: $500 
Variable cost per unit: $200 (3 machine hours x $20 per machine hour + $140 in materials)
Contribution margin per unit: $300

Recliner: 
Selling price: $800 
Variable cost per unit: $300 (2 machine hours x $20 per machine hour + $260 in materials)
Contribution margin per unit: $500

Based on the contribution margin per unit, the company should focus on producing futons since they have a higher contribution margin than recliners.

To determine the optimal units to produce, we need to calculate the contribution margin per machine hour for each product.

Futon: $300 / 3 machine hours = $100 per machine hour 
Recliner: $500 / 2 machine hours = $250 per machine hour

Since futons have a lower contribution margin per machine hour, we need to produce more units to maximize profits within our 3500 machine hour capacity.

10,500 futons can be produced in 3,500 machine hours (10,500 futons x 3 machine hours per unit). This would generate a total contribution margin of:

10,500 futons x $300 contribution margin per unit = $3,150,000

Producing any recliners would use up machine hours that could be used to produce more futons and would decrease the overall contribution margin. Therefore, the optimal choice is to produce only 10,500 futons.

Lie Around Furniture Manufactures Two Products: Futons and Recliners