Reference no: EM131776274

Problem - Allocation of scarce resources

Michigan Mfg. makes electronic products. Because the employees of one of the company's plants are on strike, the Chicago plant is operating at peak capacity. It makes two electronic products: MP3 players and PDAs. Presently, the company can sell as many of each product as can be made, but making a PDA takes twice as long in production labor time as an MP3 player. The company's production capacity is 100,000 labor hours per month. Data on each product are as follows:

                                                   MP3 players             PDAs                                    

Sales                                           $70.00                   $108                                      

Variable costs                               (58)                        (88)                                       

Contribution margin                       $12                         $20                                        

Labor hours required                     1                              2           

Fixed costs are $240,000 per month.                                                                      

a. How many of each product should the Chicago plant make? Explain your answer.

b. What qualitative factors would you consider in making this product mix decision?