The following information applies to the products of Corbett Company.

The following information applies to the products of Corbett Company.
 

	Product A				Product B
Selling price per unit	$	40			$	32
Variable cost per unit		24				12

Identify the product that should be produced or sold under each of the following constraints. Consider each constraint separately.

Required

1. One unit of Product A requires 2 hours of labor to produce, and one unit of Product B requires 4 hours of labor to produce. Due to labor constraints, demand is higher than the company’s capacity to make both products.
   
2. The products are sold to the public in retail stores. The company has limited floor space and cannot stock as many products as it would like. Display space is available for only one of the two products. Expected sales of Product A and Product B are 8,000 units and 9,000 units, respectively.
   
3. The maximum number of machine hours available is 40,000. Product A uses 2.50 machine hours, and Product B uses 4 machine hours. The company can sell all the products it produces.
   

Explanation

The decision is whether to make product A or Product B. The per unit contribution margins for the products are shown below:
 

Decision	Product A				Product B
Revenue	$	40			$	32
Variable cost		24				12
Contribution margin	$	16			$	20

a.
While Product B produces a higher contribution margin per unit, consideration must also be given to the labor that it takes to produce each product. This can be accomplished by determining the contribution margin per labor hour. The appropriate computations are shown below:
 

Decision	Product A				Product B
Contribution margin (a)	$	16			$	20
Labor hours to produce (b)		2				4
Contribution margin per labor hour (a ÷ b)	$	8			$	5

Based on the contribution margin per labor hour, Product A should be produced.

b.
Since the company can only stock one product because of limited floor space, the product that produces the higher total contribution margin should be chosen. Clearly, Product B has the higher per unit contribution margin, but the company can sell more units of Product A. Which is better, fewer sales of high-profit items or higher sales of low-profit items? To determine the answer, multiply the contribution margin per unit by the number of units sold. The solution is shown below:

Decision	Product A				Product B
Contribution margin (a)	$	16			$	20
Units produced and sold (b)		8,000				9,000
Total contribution margin (a × b)	$	128,000			$	180,000

In this case, Product B has the higher per unit contribution margin and the higher total contribution margin. Accordingly, Product B should be sold.

c.
While Product B has the higher contribution margin per unit, consideration must be given to the machine hours required to produce the products. This can be accomplished by computing the contribution margin per machine hour. The appropriate computations are shown below:

Decision	Product A				Product B
Contribution margin (a)	$	16.00			$	20.00
Machine hours to produce (b)		2.50				4.00
Total Conti. margin per machine hr. (a ÷ b)	$	6.40			$	5.00

Based on the contribution margin per machine hour, Product A should be produced. Given that the company has a maximum capacity of 40,000 machine hours and can sell all the products it produces, Product A will increase profits by $256,000 ($6.40 × 40,000 hours) where Product B can only increase profits by $200,000 ($5.00 × 40,000 hours).

Product B produces the greater profit per unit but profitability depends on the number of machine hours involved in producing the product. Product A produces a higher profit per machine hour because it takes fewer machine hours to produce. Therefore, Product A should be produced.

Thanks