Question

Limited Resources
Assume Fender produces only three guitars: the Stratocaster, Telecaster, and Jaguar. A limitation of 960 labor hours per week prevents Fender from meeting the sales demand for these products. Product information is as follows:

			Stratocaster	Telecaster	Jaguar
Unit selling price			$1,200	$900	$1,400
Unit variable costs			(630)	(450)	(850)
Unit contribution margin			$570	$450	$550
Labor hours per unit			15	10	20

Required   
Determine the weekly contribution from each product when total labor hours are allocated to the product with the highest.
1. Unit selling price.
2. Unit contribution margin.
3. Contribution per labor hour.
(Hint: Each situation is independent of the others.)

	Highest Unit Selling Price	Highest Contribution per Unit	Highest Contribution per Labor Hour
	AnswerJaguarStatocasterTelecaster	AnswerJaguarStatocasterTelecaster	AnswerJaguarStatocasterTelecaster
Labor hours available	Answer	Answer	Answer
Labor hours per unit	Answer	Answer	Answer
Weekly production	Answer	Answer	Answer
Unit contribution margin	Answer	Answer	Answer
Weekly contribution	Answer	Answer	Answer

  
Determine the opportunity cost the company will incur if management requires the weekly production of 15 Jaguars.  Hint: You want to maximize short-run profit. Think about which guitar is most profitable.
$Answer

Answer 1

1) calculation of weekly contribution margin:

Particulars	Stratocaster	Telecaster	Jaguar
Labour hours available	960	960	960
Labour hours per unit	15	10	20
Weekly Production (Labour hours available/labour hours per unit)	64 units (960/15)	96 units (960/10)	48 units (960/20)
Unit contribution margin	$570	$450	$550
Weekly contribution (Weekly Production× unit contribution margin)	$36,480 ($570×64)	$43,200 ($450×96)	$26,400 ($550×48)0

2) if management requires weekly Production of 15 Jaguar, then it has to forego Production of Telecaster, which is providing highest contribution margin per labour hour.

Total labour hours required for Production of 15 Jaguar = 300 labour hours (20×15)

If management uses the 300 labour hours for Telecaster Production, then telecaster units produced is = 30 units (300 labour hours/10 labour hours per unit)

Contribution margin lost = 30×$450

= $13,500

Opportunity cost = $13,500

Opportunity cost is the lost of contribution margin when another alternative is produced

Note:

Particulars	Stratocaster	Telecaster	Jaguar
Selling price per unit	$1200	$900	$1400
Less: Variable cost per unit	($630)	($450)	($850)
Contribution margin per unit	$570	$450	$550
Labour hours required per unit	15	10	20
Contribution margin per labour hour (Contribution margin per unit/labour hours required per unit)	$38 per labour hour ($570/15)	$45 per labour hour ($450/10)	$27.5 per labour hour ($550/20)
Rank	2	1	3