Lee Co. produces two product lines. Prices/costs follow. What portion of an hour

Question

Lee Co. produces two product lines. Prices/costs follow. What portion of an hour does it take to produce one unit of Regular? Give your answer in decimal form. Do not round. What portion of an hour does it take to produce one unit of Plain? Give your answer in decimal form. Do not round. Fill in the blanks: Lee company should manufacture (Regular/Plain) first because it has the (highest/lowest) per If Lee Company has only 175 labor hours available, how many units of regular should be manufactured? What is the maximum contribution margin the company can attain if it uses the optimal sales mix? How much additional would Lee company be willing to pay per hour to obtain more labor hours ?

Explanation / Answer

The portion of hour used by one unit of Regular = (direct labour cost per unit /direct labour cost per hour) = 15/20 = 0.75 The portion of hour used by one unit of Plain = (direct labour cost per unit /direct labour cost per hour) = 10/20 = 0.50 Particulars Regular Plain Sales ($) 55 40 less: Variable Cost Direct material ($) 16 12 Direct labour ($) 15 10 Variable Overhead ($) 12 43 8 30 Contribution per unit ($) 12 10 Direct labour hours 0.75 0.5 Contribution per labour hour ($) 16 20 Lee company should manufacture Plain first because it has the highest contribution per labour hour To produce 200 units of Plain, number of hours required = 200 units x 0.50 hr/unit = 100 hours Balance hours available = 175 - 100 = 75 hours Number of units of Regular that could be produced by LEE company = 75 hours / 0.75 hr/unit = 100 units Considering 175 hours available, the company can produce 200 units of Plain and 100 units of Regular The maximum contribution that could be obtained using this optimal sales mix = 200 x $10 + 100 * $12 = $3200 Number of hours required to produce 200 units of Plain and 300 units of Regular= 200*0.50 + 300*0.75 = 325 hours Contribution foregone for not producing 200 units of Regular = 12 * 200 = $2400 additional amount the company will be willing to pay = contribution foregone / number of hours required = $2400 / 325 hours = $7.38 per hour

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