Question

Command Company produces two types of electronic products, Product A and Product B. Electronic gaming products are hot products now and either product A or product b could be sold to keep the manufacturing facility operating a full capacity. The constraint is direct labour hours and it is insufficient to meet the combined demand for both.   Both products are processed through the same production departments.

The relevant information is as follows:

	Product A	Product B
Sales Price $	$250	$140
Costs
Direct Material	$50	$25
Direct labour ($25 per hour)	$100	$50
Variable Manufacturing overhead*	$50	$25
Fixed Manufacturing Overhead*	$20	$10
Marketing Costs – fixed	$10	$10
Operating Profit	$20	$20

*Based on direct labour hours – 4 direct labour hours for Product A and 2 direct labour hours for Product B.

Which of the two products should be produced? Provide rationale for your answer.

Answer 1

	Product A	Product B
Sales Price	$          250.00	$           140.00
Variable Costs
Direct Material	$            50.00	$             25.00
Direct Labor	$          100.00	$             50.00
Variable Manufacturing Overhead	$            50.00	$             25.00
Total Variable Costs	$          200.00	$           100.00
Contribution Margin per unit	$            50.00	$             40.00
Direct Labor hours per unit	4	2
Contribution Margin per hour	$            12.50	$             20.00

Since Direct Labor hour is a constraint and contribution margin per direct labor hour is higher for Product B, Therefore Product B should be produced and sold.