Gunst Company produces three video games: Android, Bio-Mutant, and Cyclops. Cost

Question

Gunst Company produces three video games: Android, Bio-Mutant, and Cyclops. Cost and revenue data pertaining to each product are as follows: Android Bio-Mutant Cyclops Selling price $ 100 $ 107 $ 125 Direct labor 48 24 60 Direct materials 9 8 16 Variable overhead 7 4 9 At the present time, demand for each of the company's products far exceeds its capacity to produce them. Thus, management is trying to determine which of its games to concentrate on next week in filling its backlog of orders. Gunst's direct labor rate is $12 per hour, and only 1,000 hours of direct labor are available each week. Determine the maximum total contribution margin the company can make by its best use of the 1,000 available hours. Total contribution margin? $

Explanation / Answer

Contribution margin per direct labor hour: Android: variable costs = 48+9+7 = 64. contribution margin = 100-64 = 36. Direct labor hours = 48/12 = 4. Contribution margin per direct labor hour = 36/4 = 9 Bio-Mutant: variable costs = 24+8+4 = 36. Contribution margin = 107 – 36 = 71. Direct labor hours = 24/12 = 2. Contribution margin per direct labor hour = 71/2 = 35.50 Cyclops: variable costs = 60 + 16 +9 = 85. Contribution margin = 125 – 85 = 40. Direct labor hours = 60/12 = 5. Contribution margin per direct labor hour = 40/5 = 8. They should product produce the product with the highest contribution margin per direct labor, which is the bio-mutant. Total contribution margin = $35.50 per direct labor hour*1000 direct labor hours = $35,500. Answer: $35,500

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