Question

VC A company can produce and sell only one of the following two products: Sales Machine Hours Sale Price Variable Fixed Required per Unit per Unit Cost per Unit Cost per Unit Product A 5 (2,000) = 10,000 $140 $50 $30 Product B 3(2,000) = 6,000 $98 $26 $22 If the company has limited machine capacity of 2,000 hours, what is the total contribution margin of the product it should produce in order to maximize net income? a. $48,000 b. $36,000 cm = sales - variable c. $42.000

Answer 1

Answer: a. $48,000

Explanations:

	Product A	Product B
Total Machine hours	2,000	2,000
÷ Machine hours required per unit	5	3
= Maximum Output (In Units) (i)	400	666.667
Selling price per unit	$140	$98
(Less): Variable cos per unit	($50)	($26)
Contribution margin per unit (ii)	$90	$72
Total contribution margin (i) x (ii)	$36,000	$48,000
(Less): Fixed cost
[400 x $30]	($12,000)
[666.667 x $22]		($14,667)
Net profit	$24,000	$33,333

Product B has maximum Net profit.

Contribution margin in Product B is $48,000

Thus, Total contribution margin of the product it should produce in order to maximize net income is $48,000