Omega Company reported the following information for the company's two products: Product X Product Y Selling price per unit $ 35 $ 25 Variable cost per unit 20 15 Assume that 75,000 machine hours are available; product X takes 4 machine hours to produce, and product Y takes 2 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.

Omega Company

B) Product Y should be produced because it will produce greater total profit.

Explanation:

If only Product X is produced, the total profit it will produced is:

Selling price = $35

Variable Cost = $20

Contribution = $15

Total Contribution = $15 x 75,000/4 = $281,250

If only Product Y is produced, the total profit will be:

Selling price = $25

Variable cost = $15

Contribution = $10

Total Contribution = $10 x 75,000/2 = $375,000

Product Y therefore produces a greater total profit. This is because the fixed cost will remain the same if there are no avoidable elements.

B) Product Y should be produced because it will produce greater total profits

Explanation:

The contribution margin per unit determines the contribution per unit for a given product. The contribution margin in limited resources is calculated by dividing contribution margin by per unit scarce resource. The product X contribution margin is $15 ($35 - $20) and product Y contribution margin is $10. Keeping the scarce resource if machine hours in view the contribution margin is

Product X = $15 / 4 machine hours = $3.75 per machine hour

Product Y = $10 / 2 machine hours = $5 per machine hour

The Omega Company should produce more of product Y because it uses less machine hours and is more profitable.