Morris Inc manufactures two products: Widgets and Gizmos. Widgets have a contribution margin per unit of $30 and require 2 hours of direct labor while Gizmos have a contribution margin per unit of $39 and require 3 hours of direct labor. A. In the
short-run, how should the company choose which product to produce or sell first if direct labor hours are a constraint? B. Assuming there is sufficient demand for each of these products, which of the above products should the company maximize production of first? Show calculations to support your answer.
A. In the short-run, managers should maximize the contribution margin per unit of limited resource (ex. contribution margin per direct labor hour) rather than simply focusing on the profitability of each product without consideration to the limited resources a product may need to use.
B. Morris Inc. should maximize the production of Widgets. Widgets have a contribution margin per direct labor hour of $15 ($30/2 hours) while Gizmos have a contribution margin per direct labor hour of $13 ($39/3 hours).
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