Reno Corp. produces three products, and is currently facing a labor shortage - only 3,000 hours are available this month. The selling price, costs, and labor requirements of the three products are as follows: Product A Product B Product CSelling price$50.00 $30.00 $40.00Variable cost per unit$25.00 $20.00 $25.00Direct labor hours per unit 2 ½ 1a. What is the contribution margin per unit for each product?b. What is the contribution margin per direct labor hour for each product?c. Assume Reno has unlimited demand for each product. Which product should Reno focus on producing? d. What is the total contribution margin if Reno focuses as determined in part (c)?
What will be an ideal response?
a. A $25.00, B $10.00, C $15.00: A $50 - $25 = $25; B $30 - $20 = $10; C $40 - $25 = $15.
b. A $12.50, B $20.00, C $15.00: A $25/2 = $12.50; B $10/.5 = $20; C $15/1 = $15.
c. B; Since labor is the constraint, the company will maximize profit by making the most of the product with the highest contribution margin per direct labor hour. In this case, product B has the highest at $20 per labor hour.
d. $60,000 Contribution margin: $20/labor hour × 3,000 hours
Contribution margin per unit = Selling price - Unit variable cost. Contribution margin per direct labor hour = Contribution margin per unit/Labor hours per unit. When labor hours are limited, the firm should prioritize production of the product with the highest contribution margin per labor hour.
You might also like to view...
The accounts receivable turnover ratio is computed by dividing net income by average accounts receivable
a. True b. False Indicate whether the statement is true or false
Emotion states are more diffuse, less intense, and more enduring than mood states, which tend to be more intense and directed at more specific targets.
Answer the following statement true (T) or false (F)
Negotiators should agree to the criteria for evaluating potential integrative solutions early in the negotiation process.
Answer the following statement true (T) or false (F)
A company pays $15,000 per period to rent a small building that has 10,000 square feet of space. This cost is allocated to the company's three departments on the basis of the amount of the space occupied by each. Department One occupies 2,000 square feet of floor space, Department Two occupies 3,000 square feet of floor space, and Department Three occupies 5,000 square feet of floor space. If the rent is allocated based on the total square footage of the space, Department One should be charged rent expense for the period of:
A. $4,000. B. $2,200. C. $4,400. D. $2,000. E. $3,000.