Fargo Manufacturing Company produces two industrial solvents for which the following data have been tabulated. Fixed manufacturing cost is applied to product at a rate of $1 per machine-hour.
The sales manager has had a $160,000 increase in her budget allotment for advertising and wants to apply the money to the most profitable product. The solvents are not substitutes for one another in the eyes of the company’s customers.
1. How many machine-hours does it take to produce one XY-7? To produce one BD-4? (Hint: Focus on applied fixed manufacturing cost.)
2. Suppose Fargo has only 100,000 machine-hours that can be made available to produce XY-7 and BD-4. If the potential increase in sales units for either product resulting from advertising is far in excess of these production capabilities, which product should be produced and advertised and what is the estimated increase in earned?
