Question

6 .Isle company produces two products. Information on the 2 products is as follows –
A B
Selling price per unit $10 $4
Variable cost per unit $7 $2
Labour hours per unit 1 hr. 2 hrs.
Market limitation 50,000 units 20,000 units
Total labour hours available 75,000 hrs
Total fixed cost $100,000

7. Using the information from question 6, assume there was no market limitation. What
would be the best decision?

a. Produce 50,000 units of A and 12,500 units of B
b. Produce 37,500 units of B only
c. Produce 20,000 units of B
d. Product 75,000 units of product A only

Answer 1

The contribution (ie. Selling price - Variable cost) per unit of product A is $10 - $7 = $3

The contribution (ie. Selling price - Variable cost) per unit of product B is $4 - $2 = $2

Since the contribution of product A is greater than product B, more number of product A should be produced.

Total labour hours available is 75,000 and product A requires 1 labour hour for each unit of product A.

Since there is no market limitation, all 75,000 labour hours should be used for 75,000 units of product A.

OPTION D