XYZ Company produces three products, A, B, and C. XYZ\'s plant capacity is limit
ID: 2401962 • Letter: X
Question
XYZ Company produces three products, A, B, and C. XYZ's plant capacity is limited to 200,000 machine hours per year. The following information is available for planning purposes: Product A Product B Product C demand for next year in units .... 100,000 200,000 150,000 selling price per unit ........... $18 $28 $24 variable costs per unit .......... $15 $20 $22 It is known that it takes 0.40 machine hours to produce one unit of Product A; 0.70 machine hours to produce one unit of Product B; and 0.50 machine hours to produce one unit of Product C. Calculate the number of units of Product C that XYZ Company should produce in order to maximize its net income.
Explanation / Answer
XYZ Company must produce the product with highest contribution margin per unit of machine hours in order to maximise net income.
Contribution Margin Per Unit of Machine Hour = Contribution Margin Per unit of Product / Machine Hour per unit of product
A = (18-15) / 0.40 = 7.50
B = (28-20) / 0.70 = 11.43
C = (24-22) / 0.50 = 4
Once it is determined which product maximizes the contribution margin per machine hour, demand should be considered. Often a company can not remain competitive if it totally eliminates one product in order to produce a more profitable product.
Since, Product B has higher contribution margin per unit of machine hour it will be produced first followed by Product A and then finally Product C depending on machine hours left.
Machine hours for Product B = 200,000 units x 0.70 machine hours per unit = 140,000 machine hours
Machine hours for Product A = 100,000 units x 0.40 machine hours per unit = 40,000 machine hours
Machine hours left = 200,000 - Machine hours for Product A - Machine hours for Product B
Machine hours left = 200,000 - 40,000 - 140,000 = 20,000
So, 20,000 machine hours are remaining for product C which would result in 40,000 units (20,000/0.50)
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