This is not the most cost-effective solution. See correct answer for an explanation.
Usually with a problem like this, we calculate the contribution margin per machine hour, and the product with the highest contribution margin per machine hour required to produce it is the one we should produce first with whatever available production capacity we have. Here, we don't have any sales prices, so we can't calculate any contribution margins. However, we do have the cost to purchase each unit externally. So we can use the difference between the cost to purchase externally and the variable cost to produce internally in place of the contribution margin, because the cost to purchase externally can be looked at as the amount saved by producing the units internally. Furthermore, the sale price will be the same regardless of how the product is obtained, so revenue is really irrelevant because it does not differ between the alternatives. The cost to purchase XT externally is $60, and the variable cost to produce it internally is $55. So the savings from producing it internally are $5 per unit, and that $5 divided by the number of machine hours required to produce one unit (1 hour) is the savings per machine hour, which is $5. The cost to purchase RP externally is $45, and the variable cost to produce it internally is $40. So the savings from producing it internally are also $5 per unit. But it takes 1.5 hours to produce one unit of RP internally. Therefore, the savings per machine hour are $5 divided by 1.5, or $3.333. Since the savings per machine hour for producing XT internally are $5 and the savings per machine hour for producing RP internally are only $3.33, the company should give priority to producing XT internally. The company has 12,000 machine hours available. It requires 12,000 units of XT, and each unit of XT requires 1 machine hour. Therefore, the company should manufacture all 12,000 units of XT that it requires using its 12,000 available machine hours. It will then need to purchase all of the RP it needs externally.
This is not the most cost-effective solution. See correct answer for an explanation.
This is not the most cost-effective solution. See correct answer for an explanation.
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Aspen can purchase 12,000 units of XT at $60 and/or 8,000 units of RP at $45. Based on the above, which one of the following actions should be recommended to Aspen's management?