A company has limited machine hours available for production and must decide whi

Question

A company has limited machine hours available for production and must decide which of its four products to produce and in what order. How should the company order the products with the first product being the one produced first. For instance if Product A is first, then the company will produce as much of Product A as it can sell or produce with its machines, and then the company will move onto the next product.


Contribution Margins per Unit
Product A 3.50
Product B 2.50
Product C 4.00
Product D 3.75

Machine Hours per Unit
Product A 2.50
Product B 1.75
Product C 3.25
Product D 2.50

A) A, B, C, D
B) C, D, A, B
C) B, A, D, C
D) D, B, A, C

Please explain

Explanation / Answer

Main aim of any business to (i) maximize their profit by delivering goods or services to customers or consumers or (ii) Produce more to gain market share. (i) So, here the company will produce first the most profitable product. From the given data, the contribution margin from product C is maximum. So, first company should produce product C. Then if the demand is exhausted and still the company has some capacity, it should produce next product which gives higher contribution margin in the remaining products. Here, product D gives maximum after C. So the order is C, D, A, B (ii) So, here the company will produce first the product which needs less time of machine. From the given data, the machine hours for product B is minimum. So, company should produce product B first. Then if the demand for B is exhausted and still the company has some capacity, it should produce next product either A or D. So the order is B, A, D, C or B,D,A,C

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