A company sells two products with information as follows:
$$\begin{array} { | l | r | r | }
\hline & { \text { A } } & \text { B } \
\hline \text { Price per unit } & \$ 12 & \$ 18 \
\hline \text { Variable cost per unit } & \$ 4 & \$ 12 \
\hline
\end{array}$$ Products are made by machine. 4 units of product A can be made with 2 machine hour and 2 units of product B can be made with 0.50 machine hour. If there are no constraints on production or sales of either product, then the company should emphasize sales of Product B.

Question

A company sells two products with information as follows:
 $$\begin{array} { | l | r | r | } 
\hline & { \text { A } } & \text { B } \
\hline \text { Price per unit } & \$ 12 & \$ 18 \
\hline \text { Variable cost per unit } & \$ 4 & \$ 12 \
\hline
\end{array}$$ Products are made by machine. 4 units of product A can be made with 2 machine hour and 2 units of product B can be made with 0.50 machine hour. If there are no constraints on production or sales of either product, then the company should emphasize sales of Product B.

Quizplus · Accepted Answer

To maximize profit, the company should focus on the product with the highest contribution margin per machine hour.

Product A: 
Contribution Margin per unit = Price per unit - Variable cost per unit = $12 - $4 = $8 
Contribution Margin per machine hour = ($8/4 units) x (2 machine hours/4 units) = $4 per machine hour

Product B: 
Contribution Margin per unit = Price per unit - Variable cost per unit = $18 - $12 = $6 
Contribution Margin per machine hour = ($6/2 units) x (0.50 machine hours/2 units) = $1.50 per machine hour

Therefore, product A has a higher contribution margin per machine hour and the company should emphasize sales of product A instead.

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