Two types of gears are produced: A and B. Gear A has a unit contribution margin of $200, and Gear B has a unit contribution margin of $400. Gear A uses 2 hours of grinding time, and Gear B uses 5 hours of grinding time. There are 200 hours of grinding time available per week. This is the only internal constraint.
a. Determine the optimal mix.
b. What is the total contribution margin?
c. Suppose that there is an additional demand constraint: Market conditions will allow the sale of only 80 units of each gear. Now, what is the optimal mix? Total contribution margin per week?
Contribution margin per grinding time:
Product A = $200 / 2 = $100
Product B = $400 / 5 = $80
More units of Product A should be produced
Units of Product A = 200 hours / 2
= 100 units
a.
Optimal mix = 100:0 (ie. 100 units of Product A and 0 units of Product B)
b.
Total contribution margin = $200 X 100
= $20,000
c.
80 units of Product A
Units of Product B = [200 hours - (80 X 2)] / 5
= 8 Units
Optimal mix = 80:8
Total contribution margin = ($200 X 80) + ($400 X 8)
= $19,200
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