Question

Question 2. (choosing the optimal product mix when capacity is in short supply) You produce armor kits for military vehicles. Due to a recent expansion of the war on terror to an unnamed new country, the demand for your products is booming, and you do not have enough capacity to fully fill the demand. You offer 3 versions of the product, Basic, Premium and Supreme, which offer different levels of protection. The demand and cost information is as follows: Basic Premium Supreme Demand (units) 4,000 2,000 1,000 Price/unit $1,200 $2,000 $4,000 Unit vc $400 $600 Machine hours per unit 1 1.5 Your capacity is 600 machine hours. Required: (a) Compute the CM per unit of capacity (machine-hour) for each product: Basic = $ per hour Premium = $ per hour Supreme = $ per hour (b) Based on your answer in (a), how much of each product should you produce? Basic = units Premium = units Supreme = units (if your answer for some product is zero units, explicitly enter 0 above)

Answer 1

Answers

• Requirement [a]

Working		Basic	Premium	Supreme
A	Price per unit	$1,200	$2,000	$4,000
B	Unit Variable cost	$400	$600	$1,200
C = A - B	CM per unit	$800	$1,400	$2,800
D	Machine hours per unit	1	1.5	4
E = C/D	CM per unit of machine hour = ANSWER	$800 =Answer	$933 =Answer	$700=Answer

• Requirement [b]

CM margin per MH of ‘Premium is highest’ and this should be produced first.

Available MHs = 600 MHs
MHs required per unit of ‘Premium’ = 1.5 MHs.
No. of units of Premium that can be produced = 600/1.5 = 400 units

Answers:
Basic = 0 units
Premium = 400 units
Supreme = 0 units.