Question

A.C. Tech Manufacturing Appliances manufactures three sizes of kitchen appliances: small, medium, and large. Product information is provided below. Small Medium Large Unit selling price $430 $610 $1,210 Unit costs: Variable manufacturing (270) (280) (530) Fixed manufacturing (40) (170) (270) Fixed selling and administrative (70) (75) (140) Unit profit $50 $85 $270 Demand in units 150 170 150 Machine-hours per unit 60 60 150 The maximum machine-hours available are 6,500 per week. Which of the three product models should be produced first if management incorporates a short-run profit-maximizing strategy?

Answer 1

Answer:

A.C. Tech Manufacturing Appliances

Product Models to produce first, if management incorporates a short-run profit-maximizing strategy:

                                                 Small      Medium     Large

Selling price                             $430       $610          $1,210

Variable cost                            $270       $280         $530

Contribution                            $160        $330         $680

Fixed Costs:

Fixed manufacturing                 $40         $170          $270

Fixed selling & admin                $70         $75            $140

Unit Profit                                   $50         $85            $270

Demand in units                         150         170              150

Total profit                               $7,500     $14,450      $40,500

Machine hours/unit                     60           60             150

Total machine hours required 9,000      10,200        22,500

Unit profit per machine hour   $0.83      $1.42         $1.80

If management incorporates a short-run profit maximizing strategy, given maximum machine hours available, it should first produce the large model.

Explanation:

The large model offers better contribution per unit, better profit per unit and in total, and most importantly better profit per unit of hour (major constraint).

In making a limiting factor decision, the choice goes to the product model that produces more profit under the limiting constraint.