Selection of the Most Profitable Product DVD Production Company produces two bas

Question

Selection of the Most Profitable Product DVD Production Company produces two basic types of video games, Flash and Clash. Pertinent data for DVD Production Company follow: Flash Clash Sales price $ 300 $ 210 Costs Direct materials 40 20 Direct labor ($38/hr.) 76 38 Variable factory overhead* 38 19 Fixed factory overhead* 20 10 Marketing costs (all fixed) 10 10 Total costs $ 184 $ 97 Operating profit $ 116 $ 113 *Based on labor-hours: 2 DLHs per unit of Flash, and 1 DLH per unit of Clash. The DVD game craze is at its height so that either Flash or Clash alone can be sold to keep the plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games. Flash and Clash are processed through the same production departments.

Required: 2a. Calculate the contribution margin per labor hour for both Flash and Clash. (Enter all amounts as positive values.)

2b. Which product should be produced? Flash Clash

Explanation / Answer

1) CONTRIBUTION MARGIN PER LABOUR HOUR

2) WHICH PRODUCT TO BE PRODUCED = CLASH

Since CLASH has higher contribution per hour

FLASH CLASH $ $ Sales 300 210 Less: - Direct Materials 40 20 Direct Labour 76 38 Variable Factory Overhead 38 19 Contribution Margin(per unit) 146 133 Direct Labour Hours 2 1 Contribution Margin per Labour Hr 73 133

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