Question

The following information applies to the products of Munoz Company.

	Product A			Product B
Selling price per unit	$	18		$	16
Variable cost per unit		16			13

Identify the product that should be produced or sold under each of the following constraints. Consider each constraint separately.

Required

1. One unit of Product A requires 2 hours of labor to produce, and one unit of Product B requires 6 hours of labor to produce. Due to labor constraints, demand is higher than the company’s capacity to make both products.

2. The products are sold to the public in retail stores. The company has limited floor space and cannot stock as many products as it would like. Display space is available for only one of the two products. Expected sales of Product A and Product B are 17,000 units and 13,000 units, respectively.

3. The maximum number of machine hours available is 47,000. Product A uses 2 machine hours, and Product B uses 10 machine hours. The company can sell all the products it produces.

Answer 1

1.

	Product A	Product B
Selling price per unit	$            18.00	$            16.00
Variable cost per unit	$            16.00	$            13.00
Contribution Margin per unit	$              2.00	$              3.00
Direct labor hours per unit	2	6
Contribution Margin per Direct Labor hour	$              1.00	$              0.50

Labor is constraint, so Product with highest contribution margin per labor hour is produced i.e. Product A

2.

	Product A	Product B
Selling price per unit	$            18.00	$            16.00
Variable cost per unit	$            16.00	$            13.00
Contribution Margin per unit	$              2.00	$              3.00
Expected Sales	17000	13000
Total Contribution margin	$   34,000.00	$   39,000.00

Product B should be produced and sold since it provided higher contribution margin

3.

	Product A	Product B
Selling price per unit	$            18.00	$            16.00
Variable cost per unit	$            16.00	$            13.00
Contribution Margin per unit	$              2.00	$              3.00
Machine hours per unit	2	10
Contribution Margin per Machine hour	$              1.00	$              0.30

Machine hours is constraint, so Product with highest contribution margin per machine hour is produced i.e. Product A