Firm F manufactures and sells two products: A and B. (Exercise courtesy of Prof. Mara Jess Grandes

Firm F manufactures and sells two products: A and B. (Exercise courtesy of Prof. María Jesús Grandes from IESE Business School.) Parameters for both products are as follows:

Note that fixed costs are allocated. Total fixed costs per month are \($50,000.\) The firm manufactures and sells 10,000 units of each product per month. Sales are very stable and there are no finished goods.

a. At the end of November, a machine breakdown reduces the total number of machine hours available in December to 30,000. Since not all the demand can be satisfied, how many units of product A and product B would you produce to maximize profit? Explain why.

b. On November 30, you find a supplier able to deliver both products A and B while the machine is being repaired. Assume that the capacity of the supplier is infinite. Supplier’s prices are \($20\) per unit of A, and \($31\) per unit of B. You can still make use of reduced production capacity (30,000 hours). How many units of product A and product B would you buy from the supplier in December to maximize profit? Explain why.

Transcribed Image Text:

Price ($ per unit) Variable cost ($ per unit) Fixed cost ($ per unit) Timer required in machine M (hours per unit) 42722 A B 25 35 17 23 3 4