Q1) Banner company produces three products A,B and C. Selling price, variable costs and contribution margin for one unit of each product follow.
| |
Product |
| A |
B |
C |
| Selling price..... |
$60 |
$90 |
$80 |
| Variable costs: |
|
|
|
| Direct materials |
27 |
14 |
40 |
| Direct labor |
12 |
32 |
16 |
| Variable manufacturing overhead |
3 |
8 |
4 |
| Total variable cost |
42 |
54 |
60 |
| Contribution margin |
$18 |
$36 |
$20 |
| Contribution margin ratio |
30% |
40% |
25% |
Due to strike in plant of one of its competitors, demand for company's products far exceeds its capacity to produce. Management is trying to find out which product(s) to concentrate on next week in filling its backlog of orders. Direct labor rate is $8 per hour, and only 3,000 hours of labor time are available each week.
Questions:
1. Calculate amount of Contribution margin which will be obtained per hour of labor time spent on each product.
2. Which orders would you suggest that company work on next week-the order for Product A, Product B, or Product C? Show computations.
3. By paying overtime wages more than 3,000 hours of direct labor time can be made available next week. Up to how much muts company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Describe.