Question

XYZ Company produces three products, A, B, and C. XYZ's plant capacity
is limited to 48,000 machine hours per year. The following information
is available for planning purposes:

                                    Product A       Product B       Product C
demand for next year .............  21,000 units   28,000 units   35,000 units
selling price per unit ...........    $80             $120            $160
direct material cost per unit ....    $24             $ 22            $ 36
direct labor cost per unit .......    $18             $ 50            $ 62
variable overhead cost per unit ..    $22             $ 25            $ 33 

It takes 0.80 machine hours to produce one unit of Product A; 1.20 machine
hours to produce one unit of Product B; and 1.60 machine hours to produce
one unit of Product C.

Assume that XYZ Company can work its plant overtime for 8,000 additional
machine hours. Overtime premiums will add 50% to direct labor costs.

Calculate the total number of units of Product C that XYZ Company should
produce in order to maximize its net income.

Answer 1

Answer

The units of Product C that XYZ Company should produce = 0

Explanation:

	Product A	Product B	Product C
Selling price	$          80	$       120	$       160
Variable Cost (Material + labor + variable Overheads)	$          64	$          97	$       131
Contribution per unit	$          16	$          23	$          29
Number of hours per unit	0.80	1.20	1.60
Contribution per hour	$    20.00	$    19.17	$    18.13
Rank	I	II	III

	Hours per unit	Units	Total Hours
Product A	0.80	21,000	16,800
Product B	1.20	26,000	31,200
Product C	1.60	-	-
Total Hous			48,000

Now, if overtime is to be paid for extra hours:

	Product A	Product B	Product C
Selling price	$          80	$       120	$       160
Variable Cost (Material + labor + variable Overheads)	$          73	$       122	$       162
Contribution per unit	$            7	$          (2)	$          (2)

As the contribution of Product C is negative, the company should not make any product.

In case of any doubt, please comment.