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	$	130.00			$	140.00			$	140.00
Variable costs:
Direct materials		64.50				44.00				84.80
Direct labour		15.00				30.00				12.00
Variable manufacturing overhead		5.00				10.00				4.00
Total variable cost		84.50				84.00				100.80
Contribution margin	$	45.50			$	56.00			$	39.20
Contribution margin ratio		35	%			40	%			28	%

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 $6 per hour, and only 3,170 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?

3. By paying overtime wages, more than 3,170 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.)

Answer 1

Answer
Answer 1.
	Product
	A	B	C
Contribution Margin per Unit (A)	45.5	56	39.2
Direct Labor (B)	15	30	12
Direct labor rate per Unit ©	6	6	6
Labor hour required per Unit (D = B/C)	2.5	5	2
Contribution Margin per Direct Labor Hour (A/D)	18.2	11.2	19.6

Answer 2.
	Product
	A	B	C
Contribution Margin per Direct Labor Hour	18.2	11.2	19.6
No. Labors hours Available	3170	3170	3170
Total contribution	57694	$     35,504	$         62,132
The company should Produce Product A - to Maximize the Total Contribution.

Answer 3.
	Product
	A	B	C
Normal Direct Labor rate per hour	6	6	6
Contribution Margin per Direct Labor Hour	18.2	11.2	19.6
Maximum overtime hourly rate	24.2	17.2	25.6
Acceptable overtime pay range	$6 to $ 24.2	$6 to $17.20	$6 to $25.60
Management prefer to pay as close as $6 rate as possible.
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