Carpenter's Mate, Inc. manufactures electric carpentry tools. The production department has met all production requirements for the current month and has an opportunity to produce additional units of product with its excess capacity. Unit selling prices and unit costs for three different drill models are as follows:
Home Model Deluxe Model Pro Model
Selling Price $58 $65 $80
Direct material 16 20 19
Direct labor ($10) 10 15 20
Variable overhead 8 12 16
Fixed overhead 16 5 15
Variable overhead is applied on the basis of direct-labor dollars, while fixed overhead is applied on the basis of machine hours. There is sufficient demand for the additional production of any model in the product line.
1. If Carpenter's Mate Inc. has excess machine capacity and can add more labor as needed, the excess production capacity should be devoted to producing which product? (Assume that the excess capacity will be used for a single product line).
2. If Carpenter's Mate has excess machine capacity but a limited amount of labor time, the excess production capacity should be devoted to producing which product or products?
This solution shows how to determine the product with the highest contribution margina and the highest contribution margin per dollar of direct labor in an attached Excel file.