A company produces two products, A and B. It has limited capacity but unlimited demand so it can sell as many of either product as it produces. Product A requires 2 machine hours per unit to produce, and Product B requires 1 machine hour to produce. Product A sells for $6 per unit and has variable costs of $2 per unit; Product B sells for $5 per unit and has variable costs of $2 per unit. What is the most profitable sales mix for the company?

Question

Business

Isabell Hogan

17 April, 06:56

A company produces two products, A and B. It has limited capacity but unlimited demand so it can sell as many of either product as it produces. Product A requires 2 machine hours per unit to produce, and Product B requires 1 machine hour to produce. Product A sells for $6 per unit and has variable costs of $2 per unit; Product B sells for $5 per unit and has variable costs of $2 per unit. What is the most profitable sales mix for the company?

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Answers (1)

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Jacquelyn Cooley · Answer 1

The company should use all of its limited machine hour to produce only product B. This will make it maximize profit

Explanation:

Whenever a company is faced with a limiting factor i. e a resource in short supply, the company should allocate the resource to the product with he highest contribution per unit of the scare resource

Product Cont/unit machine hr / unit cont/hr Ranking

A 6-2 = $4 per unit 2 hours $2 per hour 2nd

B 5-2 = $3 per unit 1 hour $3 per hour 1st

The company should use all of its limited machine hour to produce only product B. This will make it maximize profit