Question

Zap Video Inc. produces two basic types of video games, Clash and Slash. Pertinent data follow:

	Clash	Slash
Sales price (per unit)	$250	$172
Costs (per unit):
Direct materials	68	42
Direct labor	36	60
Variable factory overhead (@ $15 per DLH)	45	15
Allocated fixed factory overhead (based on DLHs)	36	12
Marketing expenses (all variable)	35	32
Total costs	220	161
Operating income (per unit)	$30	$11

There is insufficient labor capacity in the plant to meet the combined demand for both Clash and Slash.
Both products are produced through the same production departments.

In view of the labor shortage, which of the two products is most profitable, and how much is the contribution margin, per direct labor hour?

Clash, $30.00

Clash, $22.00

Slash, $11.50.

Clash, $11.00.

Slash, $23.00

Answer 1

Working Notes: 1
	CALCULATION OF NUMBER OF LABOR HOURS TAKEN FOR CLASH & SLASH
		Clash	Slash
	Variable Factory Overhead	$                            45	$                             15
	Divide By	"/" By	"/" By
	Variable Factory Overhead rate per hours	$                      15.00	$                       15.00
	Equals to	"=" to	"=" to
	Number of Labor Hours required for one unit	3.00	1.00
Solution:
	Calculation of Contribution margin per unit of Machine hours and ranking of the same
		Clash	Slash
	Sales Price (B)	$                          250	$                           172
	Less: Variable Cost Per Unit
	Direct Materials	$                            68	$                             42
	Direct Labor	$                            36	$                             60
	Variable Factory Overhead	$                            45	$                             15
	Marketing Expenses	$                            35	$                             32
	Total Variable Cost (B)	$                          184	$                           149
	Contribution Margin (A-B)	$                            66	$                             23
	Divide By	"/" By	"/" By
	Labor hours required per unit of production	3	1
	Equals to =
	Contribution Margin Per Labor hours	$                         22.0	$                          23.0
	Ranking of the same	2 Nd	1st
	It means Slash is more profitable
	Answer = Option 5 = Slash , $ 23.00