The Morton Company Produces and sells two products: A and B. Financial data rela
ID: 1200507 • Letter: T
Question
The Morton Company Produces and sells two products: A and B. Financial data related to producing these two products are summarized as in the table below.
Product A
Product B
Selling Price
$10.00
$12.00
Variable Costs
$5.00
$10.00
Fixed Costs
$2,000
$600
a) If these products are sold in the ratio of four A's for every three B's, what is the break-even point?
b) If the product mix has changed to five A's to five B's, what would happen to the break-even point?
c) In order to maximize the profit, which product mix should be pushed?
d) If both products must go through the same manufacturing machine and there are only 30,000 machine hours available per period, which product should be pushed? Assume that product A requires 0.5 hours per unit and B requires 0.25 hours per unit.
Product A
Product B
Selling Price
$10.00
$12.00
Variable Costs
$5.00
$10.00
Fixed Costs
$2,000
$600
Explanation / Answer
a) Break even point when one product is sold then
Break even point = TFC/Price-AVC
therefore for product A break even point= 2000/10-5 = 2000/5 = 400
and break even point for product B= 600/12-10 = 600/2 = 300
If these products are sold in the ratio of four A's for every three B's, then break even point for product A will be 400/4 = 100 and break even point for B will be 300/3 = 100.
hence break even point for both the product will remain same.
b) If the product mix has changed to five A's to five B's, then break even point for product A will be 400/5 = 80 and break even point for product B will be 300/5 = 60.
Hence due to change in ratio brea even point for both the product decreases.
c) In order to increase profit , product A should be pushed because it had greater level of break even point as compared to product B . Hence higher level will insure better productivity and return to the company.
d) If both products must go through the same manufacturing machine and there are only 30,000 machine hours available per period, Product A requires 0.5 hrs per unit and B required 0.25 hrs per unit.
Then producer should push more of product B . This is because when we see on time taen by machinery then B can be produced twice that of A product But by double Variable cost on product B over Product A this advantage vanished. So now we can see that B's fixed cost is much lesser than A's fixed cost .And even the revenue earned by Product B is higher than product A.
Hence Product B should be pushed.
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