Product A requires 5 machine hours per unit to be produced P

Product A requires 5 machine hours per unit to be produced, Product B requires only 3 machine hours per unit, and the company\'s productive capacity is limited to 240,000 machine hours. Product A sells for $16 per unit and has variable costs of $6 per unit. Product B sells for $12 per unit and has variable costs of $5 per unit. Assuming the company can sell as many units of either product as it produces, the company should:

Produce only Product A.

Produce only Product B.

Produce equal amounts of A and B.

Produce A and B in the ratio of 62.5% A to 37.5% B.

Produce A and B in the ratio of 40% A and 60% B.

Solution

You need to first calculate the contribution margin per machine hour for both A and B.

Contribution margin per unit for A = selling price