Question
In: Accounting
Ooo-La-La Company has met all production requirements for the current month and has an opportunity to...
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?
Solutions
Expert Solution
| 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 |
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