Question

Hanson Corp. produces three products, and is currently facing a labor shortage – only 3,180 hours are available this month. The selling price, costs, and labor requirements of the three products are as follows:

	Product A		Product B		Product C
Selling price	$	98.00	$	70.00	$	88.00
Variable cost per unit	$	57.00	$	29.00	$	48.00
Direct labor hours per unit		3.4		4.8		3.8

a. What is the contribution margin per unit for each product?

A-

B-

C-



b. What is the contribution margin per direct labor hour for each product? (Round your answers to 2 decimal places.)

A-

B-

C-



c. Assume Hanson has unlimited demand for each product. Which product should Hanson focus on producing?

	Product C
	Product A
	Product B

Answer 1

a. What is the contribution margin per unit for each product?

A- = $ 41

B- $ 41

C- $40

Explanation

Contribution margin per unit = Selling price per unit - Variable cost per unit

A - $98 - $57 = $41

B -  $70 - $29 = $41

C - $88 - $48 = $40

b. What is the contribution margin per direct labor hour for each product? (Round your answers to 2 decimal places.)

A - 12.06

B - 8.54

C - 10.53

Explanation

Contribution Margin per direct labor hour = (Selling price per unit - variable cost per unit) / Required number of labour hours per unit

OR

Contribution Margin per direct labor hour = Contribution margin per unit / Required number of labour hours per unit

A - ($98 - $57) / 3.4 = $41 / 3.4 = 12.06

B - ($70 - $29) / 4.8 = $41 / 4.8 = 8.54

C - ($88 - $48) / 3.8 = $40 / 3.8 = 10.53

c. Assume Hanson has unlimited demand for each product. Which product should Hanson focus on producing?

Answer - Product A

Explanation

Based on this information, Hanson Corp would prefer to sell the Product A because it provides a contribution margin per labor hour of $12.06 versus $8.54 and 10.53$ for the Product B and C respectively. The company would prefer only to make the product A, which would yield a total contribution margin of $38,351 (= $12.06 × 3,180 hours).