Question

XYZ Company produces three products, A, B, and C. XYZ's plant capacity is limited to 48,000 machine hours per year. The following information is available for planning purposes: demand for next year ..... selling price per unit ..... direct material cost per unit direct labor cost per unit .. variable overhead cost per unit Product A 21,000 units $80 $24 $18 Product B 28,000 units $120 $ 22 $ 50 $ 25 Product C 35,000 units $160 $ 36 $ 62 $ 33 $22. It takes 0.80 machine hours to produce one unit of Product A; 1.20 machine hours to produce one unit of Product B; and 1.60 machine hours to produce one unit of Product C. Assume that XYZ Company can work its plant overtime for 8,000 additional machine hours. Overtime premiums will add 50% to direct labor costs. Calculate the total number of units of Product C that XYZ Company should produce in order to maximize its net income.

I was confused with this question: I got a negative contribution margin of product C and I didn't know if that means we shouldn't produce product C.

Answer 1

Solution:

Income statement of Product C

    

Particulars	Without Overtime (30,000 Units)	With Overtime (35,000 units)
Selling Price Per unit Less: Direct Material per unit          Direct Labor Cost per unit           Variable Overhead per unit           Contribution per unit           Contribution Less: Over time cost           Profit	$160 ($36) ($62) ($33)	$160 ($36) ($62) ($33)
	$29 $870,000 Nil	$29 $1,015,000 ($248,000)
	$870,000	$767,000

From above calculations it is clear that in order to maximize their profit the company should produce 30,000 units of product C