Question

Product mix; limited resources: manufacturer LO 20.9

ArchoChem Ltd manufactures two chemicals, West1 and West2. Contribution margin data follow:

	West1	West2
Unit sales price	$13.00	$31.00
Less
Direct material	7.00	5.00
Direct labour	1.00	6.00
Variable overhead	1.25	7.50
Variable selling and administrative costs	0.75	0.50
Unit contribution margin	$ 3.00	$12.00

Page 995

ArchoChem’s production process uses highly skilled labour, which is in short supply. The same employees work on both products and earn the same wage rate of $21 per hour.

Required:

Which of ArchoChem’s products is the more profitable? Explain.

please no hand written answers

Answer 1

Column	Particulars	West 1	West 2
A	Sales Price	13.00	31.00
	Less:
B	Direct Material	7.00	5.00
C	Direct Labour	1.00	6.00
D	Variable Overheads	1.25	7.50
E	Variable selling and Administrative costs	0.75	0.50
F	Contribution	3.00	12.00
G	Labour hour rate	21.00	21.00
	Labour hours used
H=C/G	(Direct Labour/Labour rate)	0.05	0.29
I	No of Prducts produced in an Hour (1 Hour/H)	21.00	3.50
J=I*F	Contribution per hour	63.00	42.00
	West 1 can give contribution of $63 per hour whereas West 2 can give $42 per hour. Therefore, It can be said That West1 is more profitable.