The Calibri Company produces three products: F,G and H. The selling price, variable costs, and contribution margin for one unit of each product follow:
F G H
Selling price $40 $110 $50
Direct materials $16 $25 $20
Direct labor $11 $20 $12
Variable manufacturing overhead $10 $10 $8
Total variable costs $37 $55 $40
Contribution margin $3 $55 $10
Contribution margin ratio 7.5% 50% 20%
One or two major machines used to produce these products has broken down and a new one is on backorder so the company is down to one machine. Product F takes 0.20 machine hours to produce one unit, Product G takes 11 machine hours to produce one unit, and Product H takes 2.5 machine hours. There are 1,000 machine hours available on the new machine.
a. What is the amount of contribution margin that will be obtained per machine hour on each product?
b. Which product would you recommend that the company work on next week - the orders for product F, product G, or product H? Show computations.
a. The company obtains the following contribution margins per machine hour:
Product F: $3.00 contribution margin per unit/.20 machine hours per unit = $15.00 per machine hour.
Product G: $55.00 contribution margin per unit/11 machine hours per ...
This solution illustrates how to compute contribution margin per hour and how to use this information to prioritize production.