In: Accounting
The following are the selling price, variable costs, and
contribution margin for one unit of each of Banner Company’s three
products: A, B, and C:
Product | |||||||||||
A | B | C | |||||||||
Selling price | $ | 140.00 | $ | 110.00 | $ | 130.00 | |||||
Variable costs: | |||||||||||
Direct materials | 85.00 | 34.00 | 75.00 | ||||||||
Direct labour | 17.50 | 28.00 | 14.00 | ||||||||
Variable manufacturing overhead | 2.50 | 4.00 | 2.00 | ||||||||
Total variable cost | 105.00 | 66.00 | 91.00 | ||||||||
Contribution margin | $ | 35.00 | $ | 44.00 | $ | 39.00 | |||||
Contribution margin ratio | 25 | % | 40 | % | 30 | % | |||||
Due to a strike in the plant of one of its competitors, demand for
the company’s products far exceeds its capacity to produce.
Management is trying to determine which product(s) to concentrate
on next week in filling its backlog of orders. The direct labour
rate is $7 per hour, and only 3,240 hours of labour time are
available each week.
Required:
1. Compute the amount of contribution margin that will be
obtained per hour of labour time spent on each product.
(Round your intermediate calculations to 1 decimal
place. Round your answers to 2 decimal
places.)
2. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C?
Product C
Product B
Product A
3. By paying overtime wages, more than 3,240 hours of direct labour time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Given Data | ||||
S No | Particulars | Product A | Product B | Product C |
A | Selling Price | $ 140.00 | $ 110.00 | $ 130.00 |
B | Less: Variable Costs | |||
Direct Material | $ 85.00 | $ 34.00 | $ 75.00 | |
Direact Labour | $ 17.50 | $ 28.00 | $ 14.00 | |
Variable Manufacturing OH | $ 2.50 | $ 4.00 | $ 2.00 | |
Total Variable Costs | $ 105.00 | $ 66.00 | $ 91.00 | |
A-B | Contribution per Unit | $ 35.00 | $ 44.00 | $ 39.00 |
B/A | Contribution Margin Ratio | 25% | 40% | 30% |
Requirement 1 | ||||
S No | Particulars | Product A | Product B | Product C |
A | Total Labour Cost per Unit | $ 17.50 | $ 28.00 | $ 14.00 |
B | Labour Cost per Hour | $ 7.00 | $ 7.00 | $ 7.00 |
C=A/B | No of Labour Hours per Unit | 2.5 | 4 | 2 |
D | Contribution per Unit as above | $ 35.00 | $ 44.00 | $ 39.00 |
D/C | Contribution per Labour Hour | $ 14.00 | $ 11.00 | $ 19.50 |
Requirement 2 | |||
If the resources are limited, then we have to manufacture those units whose contribution per limiting factor is high.In this question, Labour hours are the limiting factor and so we have to manufacture the unit which gives the max contribution per labour hour. As calculated in the Req 1, Product C is giving max contribution for Labour Hour. So In the next week, we can produce product C till we meet the Demand Gap. After meeting the demand of Product C, We can produce product A which is giving next best contribution per hour. |
Requirement 3 | |||
If we were to get the Labour hours at extra cost, we can pay more till the contribution per hour reaches Zero. Which means if we are producing Product C, then we can pay extra of $ 19.5 per hour and if we are producing product B, we can pay extra of $14 per hour and $11 for Product B |