Question

Q.1 (5 Marks): Dubai Co. has 4,000 machine hours available to produce either Product A or Product B. The cost accounting department developed the following unit information for each product: Product A Product B Sales price $50 Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Machine time required 20 minutes (1/3 hour) 60 minutes (1 hour) $27 Instructions Management wants to know which product to produce in order to maximize the company's income. Taking into consideration the constraints under which the company operates, based on what you have learned in Chapter 6, make the necessary calculations to show which product should be produced and sold. Justify.

Answer 1

Dubai Co has limited machine hours ie 4000. Hence, it has to decide on this by contrasting the Contribution per machine hour generated by the 2 products. This in the following table:

	Product A	Product B
Sales Price per unit	27	50
Less: Variable costs per unit
Direct Material	6	8
Direct Labor	3	2
Variable Manufacturing Overhead	4	5
Contribution per unit	14	35
Total Units produced in 1 Machine hour .	20mins per unit So, 3	(Given) 1
So Contribution per Machine hour	114*3 = 42	35*1 = 35
Ranking Based on Contribution per Machine hour	1	2

Result: Product A to be Produced.

Justification:

Units produceable and total contribution earned if all 4000 hours are spent on either of one product:

• A: 4000 hrs*3 units = 12000 units. So, Contribution = 12000 units * $14 = 168000 $
• B: 4000 hrs * 1 unit = 4000 units. So, Contribution = 4000 units * $35 = 140000 $

So, producing A instead of B is justified.