Watson Corporation manufactures two products,Simple and Complex.The following annual information was gathered:
$\begin{array}{lll}&\text { Simple }&\text { Complex }\
\text { Selling price per unit } & \$ 47.00 & \$ 26.00 \
\text { Variable cost per unit } & 42.00 & 22.00
\end{array}$
Total annual fixed costs are $18,000.Assume demand for either product exceeds the factory's capacity.It takes one hour to make one unit of Complex.However,Simple takes 50% longer to manufacture when compared to Complex.Only 120,000 hours of plant capacity are available.How many units of Simple and Complex should Watson Corporation produce and sell in a year to maximize profits?
A) an equal number of Simple and Complex
B) 80,000 units of Simple and 0 units of Complex
C) 0 units of Simple and 120,000 units of Complex
D) either Simple or Complex; it does not matter

Question

Quizplus · Accepted Answer

To maximize profits, Watson Corporation should focus on the contribution margin per unit and the time it takes to produce each unit. The contribution margin per unit is calculated as the selling price per unit minus the variable cost per unit. For Simple, it's $5 ($47 - $42), and for Complex, it's $4 ($26 - $22). However, since Simple takes 50% longer to manufacture, it effectively takes 1.5 hours to produce one unit of Simple, making its contribution margin per hour $3.33 ($5 / 1.5 hours), whereas Complex, taking 1 hour per unit, has a contribution margin per hour of $4. Given the limited plant capacity of 120,000 hours and the higher contribution margin per hour for Complex, Watson Corporation should produce and sell 120,000 units of Complex to maximize profits, assuming demand exceeds the factory's capacity for both products.

Watson Corporation Manufactures Two Products,Simple and Complex Total Annual Fixed Costs Are $18,000