Exercise 16.18 The product mix decision ABC Company produces product X. product

Question

Exercise 16.18 The product mix decision ABC Company produces product X. product Y, and LO 2, 3 product Z. All three products require processing on specialized finishing machines. The capacity of these machines is 1,200 hours per month. ABC Company wishes to determine the product mix that should be achieved to meet the high demand for each product and provide the maximum profit. Following is information about each product: Seling price Variable costs Machine time per unit Monthly dernand (units) Product X $100 70 3 hours 300 Product Y $80 40 2 hours 200 1 hour 500 Required: Determine how the 1,200 hours of machine time should be allocated to the three products to provide the most profitable product mix.

Explanation / Answer

Product X Product Y Product Z Selling price 100 80 25 Variable costs 70 40 20 Contribution margin 30 40 5 Machine time per unit 3 2 1 Contribution margin per machine time 10 20 5 Ranking II I III $ Units Total machine hours available 1200 (-) Production of Y -400 200 (200*2) Remaining machine hours available for production of X & Z 800 (-) Production of X -800        266.67 (800/3) Units to be produced Product Y 200 Product X 266.67 Total contribution margin at this point of production = (200*40)+(266.67*30) = $16000

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