E. Hickman Corp. produces three products, and is currently facing a labor shorta
ID: 2536705 • Letter: E
Question
E. Hickman Corp. produces three products, and is currently facing a labor shortage only 3,000 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows: Selling price Variable cost per unit Direct labor hours per unit 3 Product A Product BProduct C 30.00 $40.00$50.00 $10.00 $30.00 2,000 $35.00 1.5 1,000 Demand 500 a. In what order should Hickman prioritize production of the productsi? b. How many of each product should be sold during the labor shortage to maximize profit? C. What is the total contribution margin if Hanson prioritizes production according to its limited resources?Explanation / Answer
b)
Under the multi-product limited resource allocation, the product giving maximum contribution per unit of limited resource is produced the maximum and then remaining resources are allocated to other products based on ranking
In the present case, labor hours are limited resources and the maximum contribution per unit of limited resource is ranked as Product C, Product A and lastly Product B
So, to produce 1,000 units of product C, labor hours consumed
= Quantity x Labor hour per unit
= 1,000 x 1.5
= 1,500 labor hours
Remaining labor hours
= Total labor hours – consumed labor hours
= 3,000 – 1,500
= 1,500 labor hours
Labor hours required for 2,000 units of product A
= 2,000 x 3
= 6,000 hours
But hours are limited to 1,500
So, quantity to be produced of product A
= Available hours / Hours required per unit
= 1,500 / 3
= 500 units
Product B will not be produced as the resources have already been consumed
c)
Total contribution margin
= Production of Product C x Contribution per unit of product C + Production of product A x Contribution per unit of product A
= 1,000 x $15 + 500 x $20
= $ 25,000
Calculations Particulars Product A Product B Product C A Selling price 30 40 50 B Variable costs 10 30 35 C = A - B Contribution per unit 20 10 15 D Labor hours per unit 3 2 1.5 E = C / D Contribution per labor hour 6.67 5.00 10.00 F = E high to low Ranking 2 3 1Related Questions
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