Question

Dalton Inc. produces and sells three products. Unit data concerning each product is shown below.

		Product
		D		E		F
Selling price		$ 190.6		$ 297.5		$ 246.4
Direct labor costs		28.6		84.7		34.1
Other variable costs		97		78		141

The company has 2,200 hours of labor available to build inventory in anticipation of the company’s peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $ 11 .

A) Number of direct hours per unit

B) Contribution margin per direct labor hour

Answer 1

Answer for A)

Number of direct hours per unit:

(direct cost per unit/direct labour cost per hour)

D-$28.6/$11=2.6 hours

E-$84.7/$11=7.7 hours

F-$34.1/$11=3.1 hours

Answer for B)

Contribution margin per direct labour hour:

Contribution (i.e sales-variable cost)/No. Of hours per unit(from A)

D-($190.6-$28.6-$97)/2.6 hours=$25

E-($297.5-$84.7-$78)/7.7 hours=$17.51

F-($246.4-$34.1-$141)/3.1 hours=$23

Determination of product to be produced(the product with more contribution margin):

Particulars	D	E	F
No. Of units can be produced	846units(approx.) (2200hours/2.6hours)	286units(approx.) [2200hours/7.7hours]	710units(approx.) (2200hours/3.1hours)
contribution (No.of units×(sales - total variable cost))	$54990 (846 units×$(190.6-28.6-97))	$38552.8 (286 units×$(297.5-84.7-78))	$50263 (710 units×$(246.6-34.1-141))

Here contribution for product D is high and it is suggested to be produced.