Restore Corp. produces three products, and is currently facing a labor shortage - only 3,000 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows: Product A Product B Product CSelling price$60.00 $25.00 $30.00Variable cost per unit$25.00 $20.00 $25.00Direct labor hours per unit 2 ½ ¼Demand 1,000 2,000 5,000a. In what order should Restore prioritize production of the products?b. How many of each product should be sold during the labor shortage to maximize profit?c. What is the total contribution margin if Restore prioritizes production according to its limited resources?
What will be an ideal response?
a. C, A, B : Since direct labor hours is the constraint, the company should focus on the product that brings in the highest contribution margin per direct labor hour. This is computed as CM/DL hour is $35/2 = $17.50 for A, $5/0.5 = $10 for B, and $5/0 .25= $20 for C.
b. 875 of A, 0 of B, 5,000 of C: 5000: C= 5,000 units × ¼ = 1,250 hours, leaving 1,750 hours for A; 1750/2 hours for A, is 875 units of A, leaving no hours for B.
c. $55,625 = (5,000 units × $5) + (875 units × $35) or (1,250 hours × $20) + (1,750 hours × $17.50)
When labor hours are limited, the firm should prioritize production of the product by their contribution margins per labor hour. Labor hours should be allocated to those with the highest contribution margin per labor hour first, then to remaining products as they are available.
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