Question: ACME Incorporated produces multiple products. Data per unit for Product A is as follows: Selling price $25 Direct material 12 Direct labour 5 Variable overhead

ACME Incorporated produces multiple products.  Data per unit for Product A is as follows:

 

Selling price

$25

Direct material

12

Direct labour

5

Variable overhead

2

Fixed overhead

3

 

The direct labour rate is $20 per hour and material costs $3 per gram. 

 

Required: 

  1. Calculate the profitability of the product (profitability index) if there is a limit on the amount of labour available.  (3 marks)
  2. If Product B has a profitability index of $18, should the company focus on Product A or Product B to maximize profit?

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