Guys – need help with this exam problem – Answer to this question option A, but I am not able to understand the rationale behind the answer
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Lark Industries accepted a contract to provide 30,000 units of Product A and 20,000 units of Product B. Lark’s staff developed the following information with regard to meeting this contract :
Product A Product B
SP $75 $125
VC $30 $48
Machine hours 3 5
Required
Total hours available – 160,000
Cost if outsourced $45 $60
Lark’s operations manager has identified the following alternatives. Which alternative should be recommended to Lark’s management?
Options :
1. Make 30,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
2. Make 25,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder.
3. Make 20,000 units of Product A, utilize the remaining capacity to make Product B, and outsource the remainder
4. Rent additional capacity of 30,000 machine hours which will increase fixed costs by $150,000.