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# Maximum Amount of Contribution Margin

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Wood Carving Corporation manufactures three products. Because of a recent lack of skilled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation:

Letter Openers Elvis Statues Candle Holders
Sales price \$31 \$83 \$65
Variable costs \$19 \$60 \$17
Labor hours required 1 6 2

Assume that Wood Carving only has 1,810 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?

\$53,290
\$40,920
\$46,740
\$34,150

#### Solution Preview

Since the labor hour is the major constrain, we need to maximize the contribution margin per hour. Contribution margin per unit is calculated as unit price - unit variable cost. Contribution margin per unit is calculated using the contribution margin per unit divided by the number of hours required per unit. Please see below:

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#### Solution Summary

This solution provides calculations for maximum amount of contribution margin.

\$2.19

## Managerial Analysis - Banner Company

Banner Company produces three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

Product
A B C
Selling price \$ 60 \$ 90 \$ 80
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Variable costs:
Direct materials 27.00 14.00 40.00
Direct labor 12.00 32.00 16.00
Variable manufacturing overhead 3.00 8.00 4.00
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Total variable cost 42.00 54.00 60.00
________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________ ________________________________________
Contribution margin \$ 18.00 \$ 36.00 \$ 20.00
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
Contribution margin ratio 30 % 40 % 25 %
________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________
________________________________________

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 labor rate is \$8 per hour, and only 3,000 hours of labor time are available each week.

Required:
1. Compute the amount of contribution margin that will be obtained per hour of labor time spent on each product. (Round your intermediate calculations and final answers to 2 decimal places. Omit the "\$" sign in your response.)

A B C
Contribution margin per labor hour \$
\$
\$

________________________________________

2. Which orders would you recommend that the company work on next week-the orders for product A, product B, or product C?

Product A

Product B

Product C

3. By paying overtime wages, more than 3,000 hours of direct labor time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? (Round your answer to 2 decimal places. Omit the "\$" sign in your response.)

Maximum amount \$ per hour

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