fixed costs are applied to the product on the basis of direct labor-hours demand

ID: 2520591 • Letter: F

Question

fixed costs are applied to the product on the basis of direct labor-hours demand for the three products exceeds the company productive capacity the taping machine is the current constraint with only 2600 minutes of taping machine time available this week

assuming that there is still unfilled demand for the product that the company should emphasize in part A above up to how much should the company be willing to pay for an additional hour of taping machine time

machine time would be used to be $_______ per hour

wnight Inc produces three products. Data conceming the selling prices and unit costs of the three products appear below Seling prike Variable costs Fbxed cos Tapping machine time iminutes) 5 90 3 70 $ 100 5 30 60 5 60 S 50 S5 $ 37 2055 Fixed costs are applied to the products on the basis of direct labor hours. Demand for the three pr oducts exceeds the company's productive capacty The tapping machine is the constraint with only 2,600 minutes of tapping machine time available this week Required: a. Given the tapping machine consiraint, which product shouid be emphaszea? O Product c Product D Product E b. Assuming mat there is sii untiled demand for the product that the company shoud emphasire in part (a) above, up to hour of lapping machine time? how much shoud the company be wining to pay for an adational B per hour

Explanation / Answer

(a).

Product E should be emphasized

Explanation;

For knowing exact product, we have to calculate contribution margin per minute for all three products;

Sale price

$90

$70

$100

Less: Variable cost

($30)

($60)

Contribution margin per unit

$60

$10

$40

Tapping machine time (minutes)

Contribution margin per minute (contribution margin / Minutes)

So on the basis of per minute contribution margin per minute, it is clear that product E has highest contribution margin per minute that is $8 hence product E should be emphasized.

(b).

Machine time would be used to be $480 per hour.

Explanation;

As we have already calculated that product E has per minute contribution margin = $8

Thus per hour contribution margin will be ($8 * 60) = $480

So company should be willing to pay for an additional hour of taping machine time = $480