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30 March, 19:58

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?

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  1. 30 March, 20:08
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    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.
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