Question

Exercise 21.9 Scarce Resources (LO21-1, LO21-2, LO21-3, LO21-4)

Gunst Company produces three video games: Android, Bio-Mutant, and Cyclops. Cost and revenue data pertaining to each product are as follows.

	Android				Bio-Mutant				Cyclops
Selling price	$	100			$	71			$	125
Direct labor		48				24				60
Direct materials		9				8				16
Variable overhead		7				4				9

At the present time, demand for each of the company's products far exceeds its capacity to produce them. Thus, management is trying to determine which of its games to concentrate on next week in filling its backlog of orders. Gunst's direct labor rate is $12 per hour, and only 1,000 hours of direct labor are available each week.

Determine the maximum total contribution margin the company can make by its best use of the 1,000 available hours. (Do not round intermediate calculations.)

Answer 1

	Android	Bio-Mutant	Cyclops
Direct materials	9	8	16
Direct labor	48	24	60
Variable overhead	7	4	9
Variable cost per unit	64	36	85
Direct labor rate	$12	$12	$12
Direct labor hours per unit(direct labor/Direct labor rate)	$4	$2	$5

	Android	Bio-Mutant	Cyclops
Selling price per unit	$100	$71	$125
Variable cost per unit	-64	-36	-85
Contribution margin per unit (a)	$36	$35	$40
Direct labor hour per unit (b)	4	2	5
Contribution margin per direct labor hour (a/b)	$9	$17.50	$8.00

Since Contribution margin per direct labor hour is highest for Bio-Mutant, hence Bio-Mutant should be produced by the company.

Contribution margin per direct labor hour for Bio-Mutant = $17.50

Total direct labor hours = 1,000

Total contribution margin = Contribution margin per direct labor hour for Bio-Mutant x Total direct labor hours

= 17.50 x 1,000

= $17,500

Kindly comment if you need further assistance. Thanks