Higgins Inc. produces and sells three products. Unit data concerning each produc

Question

Higgins Inc. produces and sells three products. Unit data concerning each product is shown below.
Product
X Y Z
Selling price $200 $300 $250
Direct labor costs 30 75 45
Other variable costs 110 90 121

The company has 2,000 hours of labor available to build inventory in anticipation of the company's peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $15.

Instructions
(a) Determine the number of direct labor hours per unit.
(b) Determine the contribution margin per direct labor hour.
(c) Determine which product should be produced and the total contribution margin for that product.

Explanation / Answer

a.
Product X: 30/15 = 2 direct labor hours per unit
Product Y: 75/15 = 5 direct labor hours per unit
Product Z: 45/15 = 3 direct labor hours per unit
b.
X: 200 – 30 – 110 = 60; 60/2 = 30 CM per DLH
Y: 300 – 75 – 90 = 135; 135/5 = 27 CM per DLH
Z: 250 – 45 – 121 = 84; 84/3 = 28 CM per DLH
c. They should produce the product with the highest contribution margin per direct labor, which would be product X.
They have 2,000 hours available. Each unit of X takes 2 hours, so they could make 1,000 units of X.
Contribution margin per unit for X = 60.
60*1,000 = 60,000
Answer: $60,000

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