A company can produce and sell only one of the following two products: If the company has machine capacity of 2,000 hours, what is the total contribution margin of the product it should produce to maximize net income?
A) $20,000
B) $24,000
C) $25,000
D) $16,000

Question

A company can produce and sell only one of the following two products:  If the company has machine capacity of 2,000 hours, what is the total contribution margin of the product it should produce to maximize net income?
A) $20,000 
B) $24,000 
C) $25,000 
D) $16,000

Quizplus · Accepted Answer

To maximize net income, the company should produce the product that generates the highest contribution margin per hour of machine capacity.

Product A: 
Contribution margin per unit = $150 - $50 = $100 
Time to produce one unit = 2 hours 
Contribution margin per hour of machine capacity = $100/2 hours = $50

Product B: 
Contribution Margin per unit = $200 - $80 = $120 
Time to produce one unit = 3 hours 
Contribution margin per hour of machine capacity = $120/3 hours = $40

Therefore, the company should produce Product A to maximize net income, as it generates a higher contribution margin per hour of machine capacity.

The total contribution margin that can be generated from Product A is: 
2,000 hours of machine capacity/2 hours per unit = 1,000 units 
1,000 units x $100 contribution margin per unit = $100,000

Hence, total contribution margin is $25,000 (i.e. $100,000 - $75,000 variable production cost).

A Company Can Produce and Sell Only One of the Following