Economics · Management Accounting - Decision Making
A company manufactures two products, Era and Sigma, using a single specialized machine. There is a total of 2,400 machine hours available. - Product Era: Generates a contribution of $45 per unit and requires 3 machine hours. - Product Sigma: Generates a contribution of $36 per unit and requires 2 machine hours. The current optimal production plan is to produce 800 units of Sigma, utilizing all 2,400 hours (since Sigma has a higher contribution per machine hour of $18 vs Era's $15). The company is considering a new one-off contract for a third product, Zeta, which would require 400 machine hours. Product Zeta provides a total contribution of $6,000 (before considering any opportunity costs). What is the shadow price of the machine hours in the current optimal production plan, and should the Zeta contract be accepted?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Shadow Price: $18.00; Reject Zeta as it results in a net loss of $1,200.✓
- 2Shadow Price: $15.00; Accept Zeta as it results in a net gain of $0.
- 3Shadow Price: $18.00; Accept Zeta as it results in a net gain of $6,000.
- 4Shadow Price: $3.00; Reject Zeta as it results in a net loss of $1,200.
Correct answer
Shadow Price: $18.00; Reject Zeta as it results in a net loss of $1,200.
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