Carter Inc. produces two products, A and B. Pertinent per-unit data follow: Ther

Question

Carter Inc. produces two products, A and B. Pertinent per-unit data follow:

There is insufficient labor capacity in the plant to meet the combined demand for both products. Both products are produced through the same production departments. The fixed factory overhead rate is $10 per direct labor hour. Assume that there are no avoidable fixed factory overhead costs.

Required:

1. Calculate the unit contribution margin for each of the two products.

2. Determine which product should be produced in priority, given the labor constraint, and explain why.

A B Sales Price $268 $225 Costs: Direct Materials 80 40 Direct Labor 43 80 Variable factory overhead (based on direct labor hours) 60 40 Fixed factory overhead (based on direct labor hours) 30 20 Marketing expenses (all variable) 40 31 Total costs 253 211 Operating income $15 $14

Explanation / Answer

1. Unit contribution margin for A = Sales per unit - Variable cost per unit

= 268 - (60 + 40)

= 268 - 100

= $168 Ans

Unit contribution margin for B = Sales per unit - Variable cost per unit

= 225 - (40 + 31)

= 225 - 71

= $154 Ans

2) Product A should be produced in priority because contribution margin as well as operating income of Product A is higher than that of Product B. Higher contribution margins means higher increase in profit. Low contribution margin signifies that business is not in much profitable situation. When resources are constraint like here labour is a constraint, business would like to utilize this scare resource to produce that product which is more profitable to the business. So here in this Product A should be produced.

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