Morris Inc manufactures two products: Widgets and Gizmos. Widgets have a contrib

Question

Morris Inc manufactures two products: Widgets and Gizmos. Widgets have a contribution margin per unit of $30 and require 2 hours of direct labor while Gizmos have a contribution margin per unit of $39 and require 3 hours of direct labor.

A. In the short-run, how should the company choose which product to produce or sell first if direct labor hours are a constraint?

B. Assuming there is sufficient demand for each of these products, which of the above products should the company maximize production of first?

Show calculations to support your answer.

Explanation / Answer

Answer:-

Where:-

A)- If Direct Labor hours are in constraint:- As per above ranking product Widgets should produce and sell. The company should choose to product Widgets in short run because its ranking is higher than product Gizmos in terms of Direct Labor hours constraint.

B)- If the Direct Labor hours are a constraint then production should be as per above strategy. But there is no constraint in Direct Labor hours the company should choose a product for production who provides a higher contribution margin per unit.

In this question product Widgets provides a contribution margin $30 per unit but product Gizmos provides a contribution margin $39 per unit which is higher than Widgets.

Hence Morris Inc should choose product Gizmos for production first.

Sttament of Ranking Particulars Widgets Gizmos Amount Amount Contribution margin per unit (a) $30 $39 Direct labor hours per unit (b) 2 3 Contrbution margin per direct labor hour C=a/b $15 $13 Ranking I II

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