The Morton Company Produces and sells two products: A and B. Financial data rela
ID: 1200542 • Letter: T
Question
The Morton Company Produces and sells two products: A and B. Financial data related to producing these two products are summarized as in the table below.
Product A
Product B
Selling Price
$10.00
$12.00
Variable Costs
$5.00
$10.00
Fixed Costs
$2,000
$600
a) If these products are sold in the ratio of four A's for every three B's, what is the break-even point?
b) If the product mix has changed to five A's to five B's, what would happen to the break-even point?
c) In order to maximize the profit, which product mix should be pushed?
d) If both products must go through the same manufacturing machine and there are only 30,000 machine hours available per period, which product should be pushed? Assume that product A requires 0.5 hours per unit and B requires 0.25 hours per unit.
Product A
Product B
Selling Price
$10.00
$12.00
Variable Costs
$5.00
$10.00
Fixed Costs
$2,000
$600
Explanation / Answer
Breakeven point is reached when Total revenue is equal to total cost and profit is zero. Let the number of units of A be X.
Revenue =price *quantity
Revenue=4x*10+3x*12=40x+36x=76x
COST=2000+600+5*4X+10*3X=2600+50X
PROFIT= 76x-50x+2600
26x=2600
x=100
Quantity of A is 400 and B is 300.
b. Total revenue =5x*10+5x*12=50x+60x=110x
total cost=2000+600+5*5x+10*5x=2600+25x+50x
profit=total revenue-total cost=0
110x-2600-75x-2600 =0
x=104
so 520 units of A and 520 units of B are sold to get breakeven point.
c. Mix 1 should be used to maximise profits.