38) Last year, a lumber company produced two types of wall boards: a regular boa

Question

38) Last year, a lumber company produced two types of wall boards: a regular board for residential purposes and, an industrial board used for offices. Marketing staff have determined that the company should specialize in the industrial boards only. Last year the company made a profit, selling twice as many residential boards as industrial boards, resulting in a fixed cost allocation of S5.00 per board. Residentia Industrial S 7 Company Sales price Variable production costs Direct labour hours Total fixed costs 50 S250 6 hrs S 1,350 S 400 12 hrs 19,500 (full capacity $400,000 Based on the above information only, which product or mix of products, should the company choose? Assume that any and all production can be sold. A) both as the company made a profit last year using this strategy B) the residential boards only, as it takes fewer direct labour hours to build C) the residential boards, as it has the highest contribution margin per direct labour hour D) the industrial board only, as it has a higher contribution margin E) any combination is equivalent, based on the contribution margin times the number of boards that could be sold

Explanation / Answer

Answer is C as the company has limited number of hours and company would like to increase its profit, also any quantity produced can be sold.

from the above analysis, it is apparent that residential gives highest contribution per hour.

Particulars Residential Industrial Sales Price                750.00           1,350.00 Less: variable cost                250.00              400.00 Contribution (A)                500.00              950.00 No of Hours per unit (B)                     6.00                 12.00 Contribution per hour (A/B)                  83.33                 79.17

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