Question

AC Inc. manufactures two models of air compressors: 6 gallon and 12 gallon. The following per...

AC Inc. manufactures two models of air compressors: 6 gallon and 12 gallon. The following per unit data apply:

               

Per Unit

6 Gallon

12 Gallon

Selling Price

$ 150

$ 300

Variable Costs

$   80

$ 204

Allocated Fixed Costs

$   20

$   35

Number of Machine Hours Needed

   4 hrs.

   6 hrs.

AC Inc. is limited to 1,160 machine hours of capacity for the production of air compressors. Demand is 200 units of the 6 gallon compressor and 100 units of the 12 gallon compressor. How many units of 6 gallon and 12 gallon compressors respectively should AC Inc. produce to maximize profits?

Multiple Choice

A. 200 and 100

B. 200 and 60

C. 140 and 100

D. 145 and 96

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Homework Answers

Answer #1

Contribution margin = Selling price - Variable cost

6 Gallon

= 150 - 80

= $70

12 Gallon

= 300 - 204

= $96

Contribution margin per machine hour

6 Gallon

= 70/4

= $17.50

12 Gallon

= 96/6

= $16

As the contribution margin of 6 Gallon is higher therefore first the demand of 6 Gallon will be fulfilled and then the remaining machine hours will be used to produce 12 Gallon.

6 Gallon 200 units will consume = 200*4 = 800 hours

Remaining hours = 1,160 - 800

= 360 hours.

12 Gallon that can be produced

= 360/6

= 60 units.

Therefore the correct option is B

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