piucessed further into Product G .25. Limited Resources LO7 ent per year Assume

Question

piucessed further into Product G .25. Limited Resources LO7 ent per year Assume Fender produces only three guitars: the Stratocaster, Dreadnought and Telecaster. A limitati of 720 labor hours per week preven minated. ts Fender from meeting the sales demand for these products. Product information is as follows relevant Stratocaster Dreadnought Telecaster $960 (600) $360 36 $600 (300) $300 24 $1,260 (1,080) $ 180 36 Unit variable costs... . aluating 0 units 9.00 1.40 10.00 20.40 Required a. Determine the weekly contribution from each product when total labor hours are allocated to the product with the highest 1. Unit selling price. 2. Unit contribution margin. 3. Contribution per labor hour. (Hint: Each situation is independent of the others.) ain Air ny has um an- e labor b. What generalization can be made regarding the allocation of limited resources to achieve short-run c. Determine the opportunity cost the company will incur if management requires the weekly produc- d. Give reasons why a company may not allocate resources in the most economical way in some profit maximization? tion of 20 Telecasters. situations it from tire air

Explanation / Answer

Answer 1

Answer 2

In case there is shortage of resouces, profit maximisation can be achieved by choosing the product that yields maximum margin for unit use of the constraint resource.

Answer 3

For making 20 Telecaster, labour hours required will be 720 Hours (20*36)

Thus entire available labour hours is utilised for production of Telecaster.

Telecaster gives Contribution per labour hour of $ 5. While Dreadnought gives contribution per labour hour of $ 12.50. Thus there is opportunity loss of $ 7.50 per labour hour. Total Opportunity loss will be $ 5,400 (7.50 * 720 hours)

Stratocaster Dreadnought Telecaster Unit Selling Price                             960                               600                      1,260 Unit Variable Cost                           (600)                            (300)                   (1,080) Unit Contribution Margin                             360                               300                         180 Labour Hours per unit                               36                                 24                            36 Contribution per labour hour                         10.00                           12.50                        5.00

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