Castle Corp. produces three products, and is currently facing a
labor shortage. The selling price, costs, and labor requirements of
the three products are as follows:
| Product A | Product B | Product C | ||||
| Selling price | $ | 47.00 | $ | 28.00 | $ | 39.00 |
| Variable cost per unit | $ | 38.00 | $ | 16.00 | $ | 33.00 |
| Direct labor hours per unit | 1.5 | 3 | 2 | |||
Castle has unlimited demand for all its products. Which product/s
should Castle Corp produce to maximize profit during the labor
shortage?
Step 1: Calculation of contribution of each product
(Contribution = sales - variable cost)
Product A: $9 ($47-$38)
Product B: $12 ($28 - $16)
Product C: $6 ($39 - $33)
Step 2: Now as there is shortage of labor hour we will find contribution a product offers per labor hour
Contribution for labor hour = contribution per unit / labor hour per unit
Product A: $9/1.5 = $6 per hour
Product B : $12/3 = $4 per hour
Product C: $6/2 = $3 per hour
Thus we can conclude that Product A gives highest contribution per hour and in case of labor shortage and unlimited demand Product A should be produced to maximize the profit
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