costs $12 per liter. It costs $100 to convert 100 liters of D into 60 liters of
ID: 2575973 • Letter: C
Question
costs $12 per liter. It costs $100 to convert 100 liters of D into 60 liters of E and 40 liters of F. Product F can be sold immediately for $12 per liter or processed further into ProductGat a additional cost of $10 per liter. Product G can then be sold for $26 per liter Required Determine whether Product F should be sold or processed further into Product G. E4-25. Limited Resources Assume Fender produces only three guitars: the Stratocaster, Dreadnought and Telecaster. A limitation of 720 In or hours per week prevents Fender from meeting the sales demand for these products. Product informauon is as follows: Telecaster $1,260 S 180 Stratocaster Dreadnought Unit scheie arice. . Unit variae oosts... $600 (300) $300 24 $960 $360 36 36 Required a. Determine the weekly contribution from each product when total labor hours are allocated to the product with the highest 1. Unit selling price. 2. Unit contribution margin. 3. Contribution per labor hour. Hint: Each situation is independent of the others.) b. What generalization can be made regarding the allocation of limited resources to achieve short-run c. Determine the opportunity cost the company will incur if management requires the weekly produc- d. Give reasons why a company may not allocate resources in the most economical way in some profit maximization? tion of 20 Telecasters. situations.Explanation / Answer
b.
When allocating limited to resources for short term profit maximization, the product with the highest contribution per the resource unit needs to be selected, since this will give the maximum profit for the company, as can be seen from the above calculations.
c.
The opportunity cost of producing 20 units of telecaster is the contribution lost from allocating the labor hours to Stratocaster which would have given a cotrubition of $7,200.
Therefore the opportunity cost of producing 20 units of Telecaster = $3,600 ($7,200 from Stratocaster - $3,600 from Telecaster)
d.
The company may not allocate resources most economical way in the short run, because,
(i) There may be commitments to be met (For e.g., as the case in c above).
(ii) The resourse cannot be allocated to the best possible option (For e.g,. if the labor is not trained in the most profitable option).
(iii) The company may not have the neseccasy information regrding profitability of the various options available.
Stratocaster Dreadnought Telecaster Unit selling price 960.00 600.00 1260.00 Unit variable cost 600.00 300.00 1080.00 Unit contribution 360.00 300.00 180.00 Labor hours per unit 36.00 24.00 36.00 Contribution per labour hour 10.00 12.50 5.00 a. When the labor hours are allocated to: 1. Product with highest selling price ,labor hours will be alllocated to Telecaster. Total available hours 720 Contribution per labor hour for telecaster 5 Total contribution for the company 3600 2. The product with highest unit contribution margin, labor hours will be allocated to Stratocaster. Total available hours 720 Contribution per hour for stratocaster 10 Total contribution for the company 7200 3. The product with highest contribution per labor hour, labor hours will be allocated to Dreadnought. Total available hours 720 Contribution per hour for Dreadnought 12.50 Total contribution for the company 9000Related Questions
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