Superior Containers produces restaurant storage containers

The company makes two sizes of containers: regular (55 gallon) and large (100 gallon). Demand for the products is so high that Superior can sell as many of each size as it can produce. The company uses the same machinery to produce both sizes. The machinery can be run for only 2,500 hours per period. Superior can produce 20 regular containers every hour, whereas it can produce 8 large containers in the same amount of time. Fixed costs amount to $250,000 per period. Sales prices and variable costs are as follows:

Per Unit Regular Large
Sales price $105 $225
Variable costs 28 42

To maximize profits, how many of each size container should Superior produce?
Given this product mix, what will the company's operating income be?
What will be an ideal response

Contribution Margin per Product:
Regular Large
Sales price per unit $105 $225
Variable cost per unit 28 42
Contribution margin per unit $ 77 $183

Contribution Margin per Machine Hour:
Regular Large
Units produced per hour 20 8
Contribution margin per unit x $77 x $183
Contribution margin
per machine hour $1,540 $1,464

When facing a constraint concerning which products to emphasize, the decision rule is to emphasize the product with the higher contribution margin per unit of the constraint. Superior will have a higher profit by producing the regular containers; therefore, this product should be emphasized.

Operating income:
Contribution margin (2,500 machine hours x $1,540 per hour) $3,850,000
Fixed costs 250,000
Operating income $3,600,000