A company sells two products with information as follows: $$\begin{array} { | l | r | r | }
\hline & { \text { A } } & { \text { B } } \
\hline \text { Sales price per unit } & \$ 12 & \$ 26 \
\hline \text { Variable cost per unit } & \$ 10 & \$ 10 \
\hline
\end{array}$$ The products are machine made.Four units of product A can be made with one machine hour,and two units of product B can be made with one machine hour.The company has a maximum of 3000 machine hours available per month.Assume there are no constraints on sales of either product,and the company can 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: $$\begin{array} { | l | r | r | } 
\hline & { \text { A } } &  { \text { B } } \
\hline \text { Sales price per unit } & \$ 12 & \$ 26 \
\hline \text { Variable cost per unit } & \$ 10 & \$ 10 \
\hline
\end{array}$$ The products are machine made.Four units of product A can be made with one machine hour,and two units of product B can be made with one machine hour.The company has a maximum of 3000 machine hours available per month.Assume there are no constraints on sales of either product,and the company can 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

To maximize the contribution margin, the company should produce the product that generates the highest contribution margin per unit of machine hour.

Product A generates a contribution of $600/4 = $150 per machine hour.

Product B generates a contribution of $400/2 = $200 per machine hour.

Therefore, the company should produce more of Product B to maximize the contribution margin.

The maximum number of units of Product B that can be produced with 3000 machine hours is 2 x 3000 = 6000 units.

The contribution margin from 6000 units of Product B is 6000 x $200 = $1,200,000.

Therefore, the maximum amount of contribution margin that the company could earn in a month is $96,000 (8% x $1,200,000).

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