Farris Company reported the following information for its two products: $$\begin{array} { l c c }
& \text { Product X } & \text { Product } Y \
\text { Selling price per unit } & \$ 2 5 &\$3 5\
\text { Variable cost per unit } & 15 & 20
\end{array}$$ Due to labor constraints,demand for each of the products is greater than its supply.Product X requires one hour of labor to produce and product Y requires three hours of labor to produce.Which of the following statements is true?
A) Product X should be produced and sold because it has a lower cost than Product Y.
B) Product X should be produced and sold because it provides a higher contribution margin per labor hour than Product Y.
C) Product Y should be produced and sold because it provided a higher contribution margin per unit than Product X.
D) Product Y should be produced and sold because it provides more revenue than Product X.

Question

Farris Company reported the following information for its two products: $$\begin{array} { l c c } 
& \text { Product X } & \text { Product } Y \
\text { Selling price per unit } & \$ 2 5  &\$3 5\
\text { Variable cost per unit } & 15 & 20
\end{array}$$ Due to labor constraints,demand for each of the products is greater than its supply.Product X requires one hour of labor to produce and product Y requires three hours of labor to produce.Which of the following statements is true?
A) Product X should be produced and sold because it has a lower cost than Product Y.
B) Product X should be produced and sold because it provides a higher contribution margin per labor hour than Product Y.
C) Product Y should be produced and sold because it provided a higher contribution margin per unit than Product X.
D) Product Y should be produced and sold because it provides more revenue than Product X.

Quizplus · Accepted Answer

Since demand is greater than supply, the company should prioritizeproducing the product that provides a higher contribution margin per labor hour. Product X provides a contribution margin of $10 per labor hour ($16 - $6) while product Y provides a contribution margin of $8.33 per labor hour ($17 - $25/3). Therefore, product X should be produced and sold before product Y. Option A is incorrect because the lower cost of Product X does not determine its profitability. Option C is incorrect because although Product Y has a higher contribution margin per unit than Product X, it takes three times longer to produce, which makes Product X more profitable per hour. Option D is incorrect because revenue alone is not the best measure of profitability.

Farris Company Reported the Following Information for Its Two Products