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?
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:
This solution provides calculations for maximum amount of contribution margin.