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Hello Sir, I have a question regarding BPP Workbook Chapter 9 Activity 8
A company produces two products: M and N and is currently drawing up its production plan for
the forthcoming month. Information is available as follows:One unit of Product M
Selling Price: $40
Material P ($4/kg): 4kg
Material Q ($5/kg): 2kg
Labor ($8/hour): 0.5hrs
Fixed Overhead: $2One unit of Product N
Selling Price: $50
Material P ($4/kg): 3kg
Material Q ($5/kg): 3kg
Labor ($8/hour): 1hrs
Fixed Overhead: $3Next month only 2,000 units of Material P will be available. Labor is also limited, at 500 hours per month. The company holds no inventory and aims to maximize profits. If m is the number of units of Product M sold per month and n is the number of units of Product N
sold per month, which of the following is the correct objective function?Here the question said that it aims to maximize profits, but the answer key on the workbook used only contribution in the calculation, without taking into account the fixed overhead cost. Can you please explain why the fixed cost is not included meanwhile the company aims to maximize profits?
Total fixed overheads are, by definition, fixed regardless of the level of production (whether or not they have been absorbed into the unit cost. This is from Paper MA). Therefore in order to maximise the total profit they need to maximise the total contribution.
Okay Sir, thank you for the explanation. It seems like I have forgotten some part of MA
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