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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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Solution Summary

Your tutorial creates a schedule in Excel (attached, click in cells to see computations) to show you how to compute the contribution margin per unit of constrained resource. Then, the strategy (which product to make) is given and the overtime that you can pay and still make money on these products.

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Your tutorial creates a schedule in Excel (attached, click in cells to ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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