Question

Aurum Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below.
Small Medium Large
Unit selling price $400 $600 $1,200
Unit costs:
Variable manufacturing (220) (280) (500)
Fixed manufacturing (80) (130) (240)
Fixed selling and administrative (60) (75) (120)
Unit profit $ 40 $ 115 $340
Demand in units 100 120 100
Machine-hours per unit 20 40 100

The maximum machine-hours available are 6,000 per week.

Which of the three product models should be produced first of management incorporates a short-run profit maximizing strategy?

Answer 1

Answer:

The large application should be produced first by management in order to incorporate short run profit maximizing strategy.

Explanation:

In order to maximize profit in the short run by management, we need to calculate the unit profit per machine hour for each appliances. Using the following formulae, as shown below:

Unit Profit / Machine-hours per unit = Unit Profit per Machine hour

Small Application

40 / 20 = $2 per machine hour

Medium Application

115 / 40 = $2.875 per machine hour

Large Application

340 / 100 = $3.4 per machine hour

As per the above calculation the large application gives the highest profit per machine hour so should be produced first. Afterwards if any machine hour is left then medium application should be produced second and finally, small application third.