Question

The following analysis of selected data is for each of the two services Gates Corporation provides.

				Service A	Service B
Per-service data at 10,000 services
Sales price				$26	$22
Service costs:
Variable				9	9
Fixed				6	4
Selling and administrative expenses:
Variable				5	3
Fixed				3	1

In the Gates operation, labor capacity is the company’s constraining resource. Each unit of A requires 3 hours of labor, and each unit of B requires 2 hours of labor. Assuming that all services can be sold at a normal price, prepare an analysis showing which of the two services should be provided with any unused productive capacity that Gates might have.

	Service
	A	B
Revenue	$Answer	$Answer
Less: Variable cost	Answer	Answer
Contribution margin	$Answer	$Answer
Labor hours per unit	Answer	Answer
Contribution margin per labor hour	$Answer	$Answer

Any unused capacity should be devoted to Service B, which has $1 less contribution margin per labor hour than does Service A.

Any unused capacity should be devoted to Service A, which has $1 more contribution margin per labor hour than does Service A.

Any unused capacity should be devoted to Service B, which has $1 more contribution margin per labor hour than does Service A.

Answer 1

Third option is correct (Any unused capacity should be devoted to Service B, which has $1 more contribution margin per labor hour than does Service A)
Explanation
Contribution margin per labour hour exceed by $1 for product B so it is advised for producing product B with unused capacity.
Service
	A	B
Revenue	$       26	$       22
Less: Variable cost (variable service cost+ variable S&A)	$       14	$       12
Contribution margin	$       12	$       10
Labor hours per unit	3	2
Contribution margin per labor hour	$         4	$         5