) Favata Corporation manufactures two products, AA and CC. The following informa
ID: 2543274 • Letter: #
Question
) Favata Corporation manufactures two products, AA and CC. The following information was available: Selling price per unit Variable cost per unit Total fixed costs $37 32 $18,000 $26 a. If Favata Corporation could sell only AA or CC, what product should they make and why gusing only the nformation above, show computations)? b. Now assume that Flava is experiencing a shortage of a material that is used for both products. Product AA uses 4 pounds of this material for each unit. Product CC uses 2.5 pounds per unit. Which product should be made with the available material (using only the information above, show computations)? c. If demand for AA is 6,000 units and demand for CC is 2,000 units and there are 20,000 pounds of the material available, what product mix would maximixe Favata's profits?Explanation / Answer
Contribution margin per unit = Selling price per unit - Variable cost per unit
a.
If Favata Corporation could sell only AA or CC, they should make AA because it gives the highest contribution margin per unit.
b.
Product CC should be made as it gives the highest contribution per pound of raw material used in production
c.
First product CC should be produced as it gives the highest contribution margin per pound used in production
Material required for CC = 2,000 units * 2.5 per unit = 5,000
Material remaining after producing CC = 20,000 - 5,000 = 15,000
Units of AA that can be produced with the remaining materials = 15,000 / 4 = 3,750
product mix for AA and CC = 2,000 and 3,750
AA CC Selling price per unit 37 26 Variable cost per unit 32 22 Contruibution margin per unit 5 4Related Questions
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