Ooo-La-La Company has met all production requirements for the current month and has an opportunity to manufacture additional units with its excess capacity. Unit selling prices and unit costs for three product lines follow.?PlainRegularSuperSelling price$40$55$65Direct material121622Direct labor (at $20 per hour)101520Variable overhead81216Fixed overhead678Variable overhead is applied on the basis of direct labor dollars, whereas fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional manufacture of all products.Required: A. If Ooo-La-La has excess machine capacity and can add more labor as needed (i.e., neither machine capacity nor labor is a constraint), which product is the most attractive to produce?B. If Ooo-La-La has excess machine
capacity but a limited amount of labor time available, which product or products should be manufactured in the excess capacity?
What will be an ideal response?
A.
| ? | Plain | Regular | Super |
| Selling price | $40 | $55 | $65 |
| Direct material | 12 | 16 | 22 |
| Direct labor (at $20 per hour) | 10 | 15 | 20 |
| Variable overhead | 8 | 12 | 16 |
| Total variable cost | $30 | $43 | $58 |
| Unit contribution margin | $10 | $12 | $7 |
When there is no limit on production capacity, Regular should be manufactured because it has the highest contribution margin per unit.
B.
| ? | Plain | Regular | Super |
| Unit contribution margin | $10 | $12 | $7 |
| Direct labor hours required (DL÷ $20) | ÷ 0.50 | ÷ 0.75 | ÷ 1.00 |
| Contribution margin per direct labor hour | $20 | $16 | $7 |
When labor is in short supply, Plain should be manufactured because it has the highest contribution margin per direct labor hour.
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