Question

Question 3:                                                                    17 Marks

Hayden Garden Tools produces two types of rakes with lifetime warranties. The industrial rake requires 2.4 labor hours and the residential rake requires 1.1 labor hours. The company has only 800 available labor hours per week. The company can sell all it can produce of either product.

                                              Industrial Residential

Selling price                              $360           $210

Variable costs                             220           150

Contribution margin                   $140           $ 60

Instructions:

1. Which rake(s) should the company sell? Justify your answer.

2. What would be the incremental benefit of obtaining 200 additional labor hours?
   

Answer 1

Particulars	Industrial	Residential
Contribution margine per unit	$           140.00	$             60.00
Hours taken to per unit	2.4	1.1
Contribution margine per hour	$             58.33	$             54.55
Particulars	Industrial	Residential
Hours Available	800	800
No. of units that can be made	333.33	727.27
Contribution margine per unit	$           140.00	$             60.00
Total Contribution	$     46,666.67	$     43,636.36

The company should sell Industrial rakes as Total contribution is higher for it.

Particulars	Industrial	Residential
Hours Available	1000	1000
No. of units that can be made	416.67	909.09
Contribution margine per unit	$           140.00	$             60.00
Total Contribution	$     58,333.33	$     54,545.45

Incremental benefit = Previous contribution - New contribution = $46,666.67 - $58,333.33 = $11,666.67