If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin per unit of operating capacity. True or False.

Question

Business

Kara Rowe

8 August, 06:51

If a company has the capacity to produce either 10,000 units of Product A or 10,000 units of Product B; assuming fixed costs are the same, production restrictions are the same for both products, and the markets for both products are unlimited; the company should commit 100% of its capacity to the product that has the higher contribution margin per unit of operating capacity. True or False.

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Answers (1)

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Alia Brock · Answer 1

The given statement is true.

Explanation:

For computing the profit of a company, the fixed cost per unit should be subtracted from contribution margin per unit.

Mathematically,

Profit = contribution margin per unit - fixed cost per unit

Since, the fixed cost and production is same and the unlimited market is there for these two products which generate high contribution margin.

So it would generate high profits as all the things are remain same in both the products.

Due to constant cost per unit in both products, the chances of increase profit is high.

Thus, the given statement is true.