The following analysis of selected data is for each of the two services Gates Co

Question

The following analysis of selected data is for each of the two services Gates Corporation provides.

In the Gates operation, labor capacity is the company’s constraining resource. Each unit of A requires 3 hours of labor, and each unit of B requires 2 hours of labor. Assuming that all services can be sold at a normal price, prepare an analysis showing which of the two services should be provided with any unused productive capacity that Gates might have.

Any unused capacity should be devoted to Service B, which has $1 less contribution margin per labor hour than does Service A.

Any unused capacity should be devoted to Service A, which has $1 more contribution margin per labor hour than does Service A.

Any unused capacity should be devoted to Service B, which has $1 more contribution margin per labor hour than does Service A.

Service A Service B Per-service data at 10,000 services Sales price $26 $22 Service costs: Variable 9 9 Fixed 6 4 Selling and administrative expenses: Variable 5 3 Fixed 3 1

Explanation / Answer

Third option is correct (Any unused capacity should be devoted to Service B, which has $1 more contribution margin per labor hour than does Service A) Explanation Contribution margin per labour hour exceed by $1 for product B so it is advised for producing product B with unused capacity. Service A B Revenue $       26 $       22 Less: Variable cost (variable service cost+ variable S&A) $       14 $       12 Contribution margin $       12 $       10 Labor hours per unit             3             2 Contribution margin per labor hour $         4 $         5

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