Wood Carving Corporation manufactures three products. Because of a recent lack o

Question

Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation Letter Elvis Candle Openers Statues Holders $ 80 40 Selling price Variable cost S30 $20 $42 $ 20 required Assume that Wood Carving only has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

Explanation / Answer

Actual requirement for Wood Cavers Letter Openers Elvis Statues Candle Holders Labor Hours Required 1 6 2 Monthly demand in units 800 800 800 Total hours required 800 4800 1600 Total time required for all product 7200 Hours Optimal production plan: Letter Openers Elvis Statues Candle Holders Sales Price $30.00 $80.00 $42.00 Less: Variable Costs $20.00 $40.00 $20.00 Contribution Margin per Unit (a) $10.00 $40.00 $22.00 Labor Hours Required (b) 1 6 2 Contribution margin per hour (a/b) $10.00 $6.67 $11.00 Rank in terms of profitability 2 3 1 Optimum Production (calculated below) 200 800 Total Labour Hours Available 1800 hours Less: hours required for 800 Candle Holders (800 × 2) 1600 hours Hours remaining 200 hours Divided by hours required per Letter Opener ÷ 1 Number of Letter Openers to produce 200 Maximum contribution margin: Candle Holders (800 × $22) $17,600.00 Letter Openers (200 × $10) $2,000.00 Maximum contribution margin $19,600.00

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