Morris Minor Corporation manufactures two products each of which require machine
ID: 430190 • Letter: M
Question
Morris Minor Corporation manufactures two products each of which require machine processing and labor operations. There is extensive demand for both products, but Morris Minor could devote all of its capacity to manufacturing either product. Relevant financial information is as follows:
Product A-12
Product A-14
Unit selling price
$220
$80
Unit variable cost
$90
$40
Machine hours per unit
1.4
.4
Labor hours per unit
6
2
In 2014 the company will have a maximum capacity of 160,000 machine hours and 120,000 labor hours. Fixed costs in 2014 will be $1,000,000.
Compute the most profitable combination of products to be produced in 2014.
Product A-12
Product A-14
Unit selling price
$220
$80
Unit variable cost
$90
$40
Machine hours per unit
1.4
.4
Labor hours per unit
6
2
Explanation / Answer
if they want to produce product A 12, then total output may be:
total labor hours= 120,000, and each unit requires 6 labor hours. they can produce maximum units= 120,000/6= 20,000 units
if we consider machine hours as base then they can produce = 160,000/1.4= 114,285 units, so here the constratint is labor hours.
total revenue of A12 is= 20,000, each contribution is $220- $90= $130. total revenue = 20,000*$130=$2,600,000
net profit= 2,600,000- 1,000,000= $1,600,000
if they produce total A14 products, then the total output can be;
based on labor hours,total output= 120,000/2= 60,000 units
contribution margin per unit= $80- 40 = $40, and total revenue= 60,000*$40= $2,400,000
net profit= 2,400,000- 1,000,000= $1,400,000
so, producing A12 will give higher profit than A14.
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