Question

#5. (5 Marks) Notlob Industries has a limited quantity of a highly sought after resource, X127. Use the following information to help Notlob Industries make the appropriate resource allocation decision: Product A Product B Product C Minimum Production Required 50 30 20 Sales Price per Unit 2,000 2,500 4,000 Variable Costs per Unit 825 900 1,500 Units of X127 Needed / Product 1 2 2.5 X127 Available 300 a)What product should Notlob focus its efforts on? b)How many of each product should be produced? c)What are the projected sales for the company using the optimal product mix (assume all products produced are immediately sold)?

Answer 1

a) Notlob has to focus on product A as it more contribution margin per unit of X127, so that if it produces more of product A it can maximize profit.

Solution :

Statement showing contribution margin per unit of X127:

	Product A	product B	product C
Selling price	2000	2500	4000
(-) variable cost	(825)	(900)	(1500)
Contribution margin per unit of product	1175	1600	2500
(÷) number of units of X127 required	1	2	2.5
Contribution margin per unit of X127	1175	800	1000
Rank as per highest contribution margin	1	3	2

b) Number of units of each product to be produced :

Product A = 190 units

Product B = 30 units

Product C = 20 units.

Solution :

As product B and product C gives low contribution margin compared to product A, these two products are produced as less as possible. However, it is not possible to produce zero units of these two products as in the question it is mentioned about the minimum units. Therefore, product B and C are produced at minimum production levels i.e. 30 units and 20 units respectively. So, with the remining units of X127 product A is produced

	Product B	Product C
Minimum units to be produced	30	20
(×) Units of X127 required to produce one unit of product	2	2.5
Total units of X127 required	60	50

Therefore, remaining units of X127 = 300 - 60 -50 = 190.

That means, by utilizing this 190 units of X127, 190 units of product A can be produced (190/1 per unit).

That means, optimal level of production :

Product A = 190 units

Product B = 30 units

Product C = 20 units.

c) Projected sales as per optimal mix is $535000

Solution :

	Product A	Product B	Product C	Total
Units produced as per optimal mix	190	30	20	240
(×) selling price	$2000	$2500	$4000
Sales	$380000	$75000	$80000	$535000

Note : assumed that figures are in dollars.