Question

Service Emphasis
The following analysis of selected data is for each of the two services Rockville Corporation provides.

				Service G	Service H
Per-unit data at 10,000 services
Sales price				$31	$18
Service costs:
Variable				8	8
Fixed				6	4
Selling and administrative expenses:
Variable				5	2
Fixed				3	1

In the Rockville's operation, labor capacity is the company's constraining resource. Each unit of G requires 3 hours of labor, and each unit of H requires 1 hours of labor. Assuming that all services can be sold at a normal price, prepare an analysis showing which of the two services should be provided with any unused productive capacity that Rockville might have.

	Service
	G	H
Revenue	$Answer	$Answer
Less: Variable cost	Answer	Answer
Contribution margin	$Answer	$Answer
Labor hours per unit	Answer	Answer
Contribution margin per labor hour	$Answer	$Answer

A. Any unused capacity should be devoted to Service H, which has $2 less contribution margin per labor hour than does Service G.

B. Any unused capacity should be devoted to Service G, which has $2 more contribution margin per labor hour than does Service H.

C. Any unused capacity should be devoted to Service H, which has $2 more contribution margin per labor hour than does Service G.

Answer 1

Analysis showing any unused productive capacity that Rockville might have
	Service
	G	H
Revenue	$310,000	$180,000
Less: Variable cost	$130,000	$100,000
Contribution margin	$180,000	$80,000
Labour hour per unit	3	1
Contribution margin per labour hour	$6	$8
Any unsed capacity should be devoted to Service H, which has $2 more contribution
margin per labour hour than does Service G.
Working note:
	Service
	G	H
Revenue	10000 services x $31 each	10000 services x $18 each
	Service
Variable cost per unit	G	H
Variable service cost	$8	$8
Variable selling and admin. Expenses	$5	$2
Total Variable cost	$13	$10
Number of services	10000	10000
Total Variable cost	$130,000	$100,000
Contribution margin per labour hour
Contribution margin	$180,000	$80,000
Labour hour per service	3	1
Total labour hour required for 10000 services	30000	10000
Contribution margin per labour hour	180000/30000	80000/10000
	$6	$8