Question

Last year, a sailboard company produced two types of boards: a regular board for multi-purpose sailing; and, a special trick board used by experts for competitions. The regular board sells for $750 and the competition board sells for $1,350. The variable production costs are $250 and $400 respectively, and the company has $400,000 in fixed costs overall. Marketing staff have determined that the company should specialize in the competition boards only, and sell the regular boards, if at all, under a different brand name. Last year the company made a profit, selling twice as many regular boards as competition boards, resulting in a fixed cost allocation of $5.00 per board. It takes 6 hours of direct labour to make a regular board and 12 hours to make a competition board. The company worked at full capacity of 19,500 direct labour hours last year.

Based on the above information only, which product or mix of products, should the company choose? Assume that any and all production can be sold.

		a) the competition board only, as it has a higher contribution margin
		b) the regular board only, as it takes fewer direct labour hours to build
		c) the regular board only, as it has the highest contribution margin per direct labour hour
		d) any combination is equivalent, based on the contribution margin times the number of boards that could be sold
		e) both as the company made a profit last year using this strategy

Answer 1

Our Answer here is c) the regular board only, as it has the highest contribution margin per direct labor hour

As where there is some limiting factor so it will be necessary to maximize the profit on the basis of contribution earned per unit of limiting factor as in the present case the limiting factory is labor hours so the product which gives maximum contribution per unit of labor used will be produced in maximum quantity so in present case it is better to produce The regular board as The Regular Board gives Contribution of $83.33 per hour and The Competition Board gives $75 per labor hour

Fixed overhead will not be considering factor here

the required calculation for the above decision are as following

	The regular board	The competition board
Selling Price	$                             750	$                                 1,350
less:Variable Cost	$                             250	$                                     450
Contribution Per Unit	$                             500	$                                     900
Labor Hours Required Per Unit	6	12
Contribution Per Labor Hours	$                          83.33	$                                 75.00

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