Question

Ooo-La-La Company has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow.

	Plain				Regular				Super
Selling price	$	60			$	75			$	85
Direct material		16				20				26
Direct labor (at $25 per hour)		15				20				15
Variable overhead		12				16				20
Fixed overhead		10				11				12

Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products.

A. If Ooo-La-La has excess machine capacity and can add more labor as needed (i.e., neither machine capacity nor labor is a constraint), which product is the most attractive to produce?
B. If Ooo-La-La has excess machine capacity but a limited amount of labor time available, which product or products should be manufactured in the excess capacity?

Answer 1

Contribution per unit
Particulars	Plain	Regular	Super
Selling price per unit	$    60.00	$    75.00	$    85.00
Less: Variable costs
Direct material	$ (16.00)	$ (20.00)	$ (26.00)
Direct labour	$ (15.00)	$ (20.00)	$ (15.00)
variable overhead	$ (12.00)	$ (16.00)	$ (20.00)
Contribution per unit	$    17.00	$    19.00	$    24.00
The fixed costs are absorbed by normal production and are not expected to be increased on additional production
(1) Since, all the additional units produced has sufficient demand in the market. The product which has highest contribution is to be produced, when there are no constraints in labour or machine capacity
So, product Super has to be manufactured
.(2) Since there is adequate machine capacity but there is a constraint in labour hours the product which gives more contribution per labour hour should be produced for the effective utilisation of available labour hours and yield maximum profits
Computation of contribution per labour hour
Particulars	Plain	Regular	Super
Labour cost per unit of production	$    15.00	$    20.00	$    15.00
Labour hours required to produce one unit (Labour cost/Rate per hour 25)	0.6	0.8	0.6
Contribution per unit	$    17.00	$    19.00	$    24.00
Contribution per labour hour (Contribution per unit/Labour hours required to produce one unit)	$    28.33	$    23.75	$    40.00