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: Product A demand for next year ............. 21,000 units selling price per unit ........... $80 direct material cost per unit .... $24 direct labor cost per unit ........ $18 variable overhead cost per unit .. $22 Product B 28,000 units $120 $ 22 $ 50 $ 25 Product C 35,000 units $160 $ 36 $ 62 $ 33 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.

Answer 1

Answer

Units of Product C to be produced = 0

Calculations:

	Product A	Product B	Product C
Selling price	$          80	$       120	$       160
Variable Cost (Material + labor + variable Overheads)	$          64	$         97	$       131
Contribution per unit	$          16	$         23	$         29
Number of hours per unit	0.80	1.20	1.60
Contribution per hour	$    20.00	$    19.17	$    18.13
Rank	I	II	III

	Hours per unit	Units	Total Hours
Product A	0.80	21,000	16,800
Product B	1.20	26,000	31,200
Product C	1.60	-	-
Total Hous			48,000

It is clear that we will produce Good A completely and 26,000 units of B without overtime.

Now, Costs with overtime:

	Product A	Product B	Product C
Selling price	$          80	$       120	$       160
Variable Cost (Material + labor + variable Overheads)	$          73	$       122	$       162
Contribution per unit	$            7	$          (2)	$          (2)

As contribution o B and C is negative, we should not produce C at all.

In case of any doubt, please comment.