Question

A manufacturer has a limited supply of 1,200 lbs of raw materials that can be used to produce either Product X or Y, details of which are given below.

	Product X	Product Y
Selling price per unit	$200	$250
Variable costs per unit	$176	$200
Raw materials used per unit	8 lbs	10 lbs

Which one of the following should the manufacturer produce in order to maximize contribution margin?

• A.150 units of Product X.

• B.120 units of Product Y.

• C.100 units of Product X and 40 units of Product Y.

• D.100 units of Product X and 80 units of Product Y.

Answer 1

One of the following that manufacturer should produce in order to maximize contribution margin:

The correct option is

• B) 120 units of product Y

Particulars	Product X	Product Y
Total raw materials available (a)	1200lbs	1200lbs
Raw material used for one unit (b)	8lbs	10lbs
Total output units (c) = (a/b)	150 units	120 units
Selling price per unit (d)	$200	$250
Variable cost per unit (e)	$176	$200
Contribution margin per unit (f)=(d)-(e)	$24	$50
Total contribution on output (c)×(f)	$3600	$6000

Since the total contribution on output is high for product Y, it is recommended to produce product Y and with the limited supply of 120lbs, manufacturer can produce only 120units

Therefore,

In order to maximize the contribution margin, manufacturer should produce 120 units of product Y

______×_______

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