The following are the selling price, variable costs, and contribution margin for

Question

The following are the selling price, variable costs, and contribution margin for one unit of each of Banner Company's three products: A, B, and C: Product Selling price $100.00 $100.00 $120.00 Direct materials Direct labour Variable manufacturing overhead 63.00 51.00 12.50 2.50 20.00 78.00 84.00 10.00 2.00 96.00 24.00 4.00 Total variable cost Contribution margin Contribution margin ratio s 22.00 s25.00 22% 25% 20% Due to a strike in the plant of one of its competitors, demand for the company's products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labour rate is $5 per hour, and only 3,820 hours of labour time are available each week Required 1. Compute the amount of contribution margin that will be obtained per hour of labour time spent on each ur intermediate calculations to 1 decimal place.) Contribution margin per labour hour

Explanation / Answer

Solution:(1): Calculation of contribution margin:

Solution:(2): Calculation of total contribution margin:

Since, the total contribution margin is higher in case of product-C, therefore, product-C is recommended to order.

Solution:(3): The amount Banner Company should be willing to pay in overtime wages for additional direct labor hour time depends on how the time would be used. If there are unfilled orders for all of the products. Banner would presumably use the additional time to make more of Product-C. Each hour of direct labor time generates $12 of contribution margin over and above the usual direct labor cost. Therefore, Banner should be will to pay upto (maximum) $17 per hour (the $5 usual wage plus the contribution margin per hour of $12) for additional labor time, but would be of course prefer to pay far less.

Particulars A B C Contribution margin per unit (x) $22 $25 $24 Direct labor cost per unit(a) $12.50 $20 $10 Direct labor rate per hour(b) $5 $5 $5 Direct labor hours required per unit (a÷b=c) $2.5 $4 $2 Contribution margin per direct labor hour (x÷c) $8.8 $6.25 $12

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