The following information applies to the products of Thornton Company.
2.27 points
Product
A
$17
13
Product
B
$17
11
Selling price per unit
Variable cost per unit
eBook
Identify the product that should be produced or sold under each of the following constraints. Consider each constraint separately.
Required
a. One unit of Product A requires 2 hours of labor to produce, and one unit of Product B requires 4 hours of labor to produce. Due to labor constraints, demand is higher than the company’s capacity to make both products.
b. The products are sold to the public in retail stores. The company has limited floor space and cannot stock as many products as it would like. Display space is available for only one of the two products. Expected sales of Product A and Product B are 11,000 units and 10,000 units, respectively.
c. The maximum number of machine hours available is 46,000. Product A uses 2 machine hours, and Product B uses 10 machine hours. The company can sell all the products it produces.
The Correct Answer and Explanation is :
Answer
Let’s analyze each of the constraints one by one and determine which product should be prioritized.
a. Labor Constraints
Product A requires 2 hours of labor to produce, while Product B requires 4 hours of labor. We are facing labor constraints, so we need to calculate the contribution margin per labor hour for both products to determine which provides a higher return per hour of labor.
Contribution margin per unit:
- Product A: Selling price = $17, Variable cost = $13, so Contribution margin = $17 – $13 = $4.
- Product B: Selling price = $17, Variable cost = $11, so Contribution margin = $17 – $11 = $6.
Now, calculate the contribution margin per labor hour:
- Product A: Contribution margin per labor hour = $4 / 2 = $2 per hour.
- Product B: Contribution margin per labor hour = $6 / 4 = $1.50 per hour.
Since Product A provides a higher contribution margin per labor hour, Product A should be prioritized under the labor constraint.
b. Display Space Constraints
We have limited display space, and only one of the products can be stocked. The company expects to sell 11,000 units of Product A and 10,000 units of Product B. To decide which product should be stocked, we will calculate the total contribution margin for each product:
- Product A: Contribution margin per unit = $4, Total contribution margin = $4 * 11,000 = $44,000.
- Product B: Contribution margin per unit = $6, Total contribution margin = $6 * 10,000 = $60,000.
Since Product B has a higher total contribution margin, it should be prioritized for display space.
c. Machine Hours Constraints
We are given a maximum of 46,000 machine hours. Product A uses 2 machine hours per unit, and Product B uses 10 machine hours per unit. To maximize profit, we need to calculate the contribution margin per machine hour for each product:
- Product A: Contribution margin per machine hour = $4 / 2 = $2 per hour.
- Product B: Contribution margin per machine hour = $6 / 10 = $0.60 per hour.
Since Product A provides a higher contribution margin per machine hour, Product A should be prioritized under the machine hour constraint.
Conclusion:
- Labor constraint: Produce Product A.
- Display space constraint: Stock Product B.
- Machine hour constraint: Produce Product A.
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