Question

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	$	70.00			$	130.00			$	180.00
Variable costs:
Direct materials		30.50				51.00				114.00
Direct labour		12.00				32.00				24.00
Variable manufacturing overhead		3.00				8.00				6.00
Total variable cost		45.50				91.00				144.00
Contribution margin	$	24.50			$	39.00			$	36.00
Contribution margin ratio		35	%			30	%			20	%

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 $8 per hour, and only 3,850 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.)

       

2.	Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C?
	Product A Product B Product C

3.	By paying overtime wages, more than 3,850 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.)

       

Answer 1

1. Compute the amount of contribution margin that will be obtained per hour of labor time spent on each product

	A	B	C
Contribution margin per unit	24.50	39.00	36.00
Direct labor	12.00	32.00	24.00
Direct labor rate per hour	8	8	8
Direct labor hours required per unit	1.50	4	3
Unit Prod, per limiting resource (DLH)	0.67	0.25	0.33
CM per unit of limiting resource (DLH)	$ 16.00	$ 9.75	$ 12.00

2. Which orders would you recommend that the company work on next week -- the orders for product A, product B, or product C

Order for PRDUCT - A

	A	B	C
Contribution margin per direct labor-hour	$ 16.00	$ 9.75	$ 12.00
Direct labor-hours available	3850	3850	3850
Total contribution margin	$ 61,600	$ 37,537	$ 46,200

3.By paying overtime wages, more than 3,850 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

	A	B	C
Normal direct labot rate per hour	8	8	8
CM per direct labor hour	16	9.75	12
Maximum overtime hourly rate	24	17.75	20
Acceptable overtime pay range:	$ 8 to $ 24	$ 8 to $ 17.75	$ 8 to $ 20

Management would prefer to pas as close to the $ 8.00 rate as possible