Question

Case 4 A Saudi Company has 8,000 machine hours available to use to produce either Product A or Product B. The cost accounting department developed the following unit information for each of the products Product A Product B Sales price SR57 SR71 Direct materials 19 21 Direct labor 15 14 Variable manufacturing overhead Fixed manufacturing overhead Machine hours required 8 12 3 6 6 12 Management desires to make a decision regarding which product to produce in order to maximize the company's income Required Taking into consideration the constraint under which the company operates, prepare a report to show which product should be produced and sold (1 mark)

Answer 1

	Product A	Product B
Sales Price	$              57	$              71
Less Variable Costs
Direct Materials	$              19	$              21
Direct labor	$              15	$              14
Variable Manufacturing Overhead	$                 8	$              12
Total Variable Costs	$              42	$              47
Contribution Margin	$              15	$              24
Machine hours Required	0.6	1.2
Contribution Margin per machine hour	$              25	$              20

Since Contribution Margin per machine hour is highest for Product A, Product should be produced and sold