Berney\'s produces two products, A and B. A sells for $4.00 per unit; B sells fo

Question

Berney's produces two products, A and B. A sells for $4.00 per unit; B sells for $5.25 per unit. Variable costs for A and B are respectively, $2.50 and $2.95. There are 3,600 direct labor hours per month available for producing one of the two products. Fixed manufacturing overhead costs is allocated at $600 per month. Product A requires 3 direct labor hours and product B requires 4.5 direct labor hours.

1. What is the contribution margin for each product that Berney produces?

2. What is the contribution margin per direct labor hour for each product?

3. What is the total amount of products produced if ony that product is produced each month?

4. What is the income Berney will earn for a month if only one product is produced and the total production is sold?

Explanation / Answer

Contribution margin for each product

Product A: 4 - 2.50 = $1.50

Product B: 5.25 - 2.95 = $2.30

Contribution margin per direct labour hour

Product A: 1.50/3 = $0.5/hour

Product B: 2.30/4.5 = $0.51/Hour

What is the total amount of products produced if ony that product is produced each month?

If only one product is produced, it is wise to produce product B because product B earns more contribution per hour compared to product A.

Total labor hours = 3600

Total amount of products produced = 3600/4.5 = 800 units

What is the income Berney will earn for a month if only one product is produced and the total production is sold?

Contribution = 800 x 2.30 = $1840

Net income = 1840 - 600 = $1240

Hope this helps!

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