Question

Gunst Company produces three video games: Android, Bio-Mutant, and Cyclops. Cost and revenue data pertaining to each product are as follows.

Android Bio-Mutant Cyclops

Selling price $100 $65 $125

Direct labor 48 24 60

Direct materials 9 8 16  

Variable overhead 7 4 9

At the present time, demand for each of the company's products far exceeds its capacity to produce them. Thus, management is trying to determine which of its games to concentrate on next week in filling its backlog of orders. Gunst's direct labor rate is $12 per hour, and only 1,000 hours of direct labor are available each week.

Determine the maximum total contribution margin the company can make by its best use of the 1,000 available hours. (Do not round intermediate calculations.)

Total contribution Margin ________________?

Answer 1

• All working forms part of the answer
• Amounts are in $
• Calculation of direct labor hour per unit

	Android	Bio Mutant	Cyclops
Direct labor (A)	$48	$24	$60
Direct labor rate (B)	$12	$12	$12
Direct labor hours per unit (A/B)	4	2	5

• Calculation margin per Labor Hour

	Android	Bio Mutant	Cyclops
Sale price	100	65	125
(-) variable cost
Direct labor	48	24	60
Direct material	9	8	16
Variable overhead	7	4	9
Total variable cost	64	36	85
Contribution margin	$36	$29	$40
Direct labor hours per unit	4	2	5
Contribution margin per DLH	$9	$14.5	$8
Ranking to produce	2nd	1st	3rd

• Since, Bio Mutant has the HIGHEST CONTRIBUTION MARGIN per Direct labor hours (which are in limited numbers), Bio Mutant will be only produced from available 1000 direct labor hours.
• Calculation of Contribution margin

Available hours	1000 DLHs
No. of units that can be produced of Bio Mutant [1000/2 DLH per unit]	500 units
Contribution per unit	$29 per unit
Total Contribution margin	$14,500