Omega Company reported the following information for the company's two products: $$\begin{array} { l c c }
& \text { Product X } & \text { Product } Y \
\text { Selling price per unit } & \$ 3 5 & \$ 2 5 \
\text { Variable cost per unit } & 2 0 & 15
\end{array}$$ Assume that 75,000 machine hours are available; product X takes four machine hours to produce,and product Y takes two machine hours to produce.The company can sell all it can make of either product.Which of the following statements is true?
A) Product Y should be produced because more of it can be produced.
B) Product Y should be produced because it will produce greater total profit.
C) Product X should be produced because it provides a greater contribution margin.
D) Both products provide the same total profit.

Question

Omega Company reported the following information for the company's two products: $$\begin{array} { l c c } 
& \text { Product X } & \text { Product } Y \
\text { Selling price per unit } & \$ 3 5 & \$ 2 5 \
\text { Variable cost per unit } &  2 0 & 15
\end{array}$$ Assume that 75,000 machine hours are available; product X takes four machine hours to produce,and product Y takes two machine hours to produce.The company can sell all it can make of either product.Which of the following statements is true?
A) Product Y should be produced because more of it can be produced.
B) Product Y should be produced because it will produce greater total profit.
C) Product X should be produced because it provides a greater contribution margin.
D) Both products provide the same total profit.

Quizplus · Accepted Answer

To determine which product should be produced, we need to compute the contribution margin per machine hour for each product as follows:

Product X: ($60 - $20)/4 = $10 per machine hour
Product Y: ($48 - $16)/2 = $16 per machine hour

Since product Y has a higher contribution margin per machine hour, it is more profitable to produce. Therefore, the company should produce and sell as much product Y as possible. Choice B is the correct answer.

Omega Company Reported the Following Information for the Company's Two