EXERCISE 12-5 Utilization of a Constrained Resource (LO3] The following are the
ID: 2511871 • Letter: E
Question
EXERCISE 12-5 Utilization of a Constrained Resource (LO3] The following are the selling price, variable costs, and contribution margin for one unit of each of Banner Company's three products: A, B, and C: A Product B $90 C $80 Selling price. Variable costs: Direct materials.. Direct labour ...... Variable manufacturing overhead Total variable cost. Contribution margin ...... Contribution margin ratio ....... lelalu 34 g 40% 25% Due to a strike in the plant of one of its competitors, demand for the company's products far exceeds its capacity to produce. Management is trying to determine which product(s) to con- centrate on next week in filling its backlog of orders. The direct labour rate is $8 per hour, and only 3,000 hours of labour time are available each week. Required: 1. Compute the amount of contribution margin that will be obtained per hour of labour time spent on each product. 2. Which orders would you recommend that the company work on next week-the orders for product A, product B, or product C? Show computations. 3. By paying overtime wages, more than 3,000 hours of direct labour time can be made avail- By pavir able next week. Up to how much should the company be willing to pay per hour in over- time wages as long as there is unfilled demand for the three products? Explain.Explanation / Answer
Answer:
A)
Compute the amount of contribution margin that will be obtained per hour of labor time spent on each product.
A
B
C
Contribution margin per unit
$18
$36
$20
Direct labor
$12
$32
$16
Direct labor rate per hour
8
8
8
Direct labor hours required per unit
1.50
4.00
2.00
Unit Prod, per limiting resource (DLH)
0.67
0.25
0.5
CM per unit of limiting resource (DLH)
$12.00
$9.00
$10.00
________________________________________________________
b)
Which orders would you recommend that the company work on next week -- the orders for product A, product B, or product C?
A
B
C
Contribution margin per direct labor-hour
$12
$9
$10
Direct labor-hours available
x 3000
x 3000
x 3000
Total contribution margin
$36,000
$27,000
$30,000
_______________________________________________
c)
A
B
C
Normal direct labot rate per hour
$8.00
$8.00
$8.00
CM per direct labor hour
$12.00
$9.00
$10.00
Maximum overtime hourly rate
$20.00
$17.00
$18.00
Acceptable overtime pay range:
$8 to $20
$8 to $17
$8 to $18
Management wuld prefer to pas as close to the $8.00 rate as possible
A
B
C
Contribution margin per unit
$18
$36
$20
Direct labor
$12
$32
$16
Direct labor rate per hour
8
8
8
Direct labor hours required per unit
1.50
4.00
2.00
Unit Prod, per limiting resource (DLH)
0.67
0.25
0.5
CM per unit of limiting resource (DLH)
$12.00
$9.00
$10.00
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