Question

Rope Co. makes two products, both of which use a scarce resource: direct labour hours. Both products have a unit contribution margin of $20, and there is sufficient demand for both products that Rope can sell all of the products it can produce. However, the direct labour cost per unit of Product Y is higher than that for Product X. The unit price of Product X is higher than the unit price of Product Y. Rope is interested in maximizing its profits. Which of the following statements is correct?

a) Rope should produce both products, but more Y than X. b) Rope should only produce Y. c) Rope should produce both products, but more X than Y. d) Rope should only produce X

Answer 1

Solution:

As per the question, direct labour hours are scarce and thus it is the limiting factor.So contribution per unit after taking limiting factor into consideration has to be taken.

In this question contribution for both products is equal.But direct labour cost per unit of product Y is higher than that of X.So, product X should be produced by Rope after considering the fixed cost.