Question

Each of the following situations is independent:

Short-Term Product-Mix Decision DVD Production Company produces two basic types of video games, Flash and Clash. Pertinent data for DVD Production Company follow:

	Flash			Clash
Sales price	$	380		$	220
Costs
Direct materials		80			40
Direct labor (@ $25/hr.)		100			50
Variable factory overhead*		80			50
Fixed factory overhead*		30			20
Marketing costs (all fixed)		20			15
Total costs	$	310		$	175
Operating profit	$	70		$	45

*Based on direct labor hours: 4 direct labor hours (DLHs) per unit of Flash and 2 DLHs per unit of Clash.

The DVD game craze is at its height so that either Flash or Clash alone can be sold to keep the plant operating at full capacity. However, labor capacity in the plant is insufficient to meet the combined demand for both games. Flash and Clash are processed through the same production departments.

Required:

a. Calculate the contribution margin per labor hour for both Flash and Clash. (Round your answers to 2 decimal places.)

Answer 1

Solution a:

Computation of Contribution Margin per Labor Hour
	Flash	Clash
Sales Price	$380.00	$220.00
Less: Variable costs:
Direct Material	$80.00	$40.00
Direct Labor	$100.00	$50.00
Variable Factory Overhead	$80.00	$50.00
Contribution Margin per unit	$120.00	$80.00
Direct Labor Hours per unit	4	2
Contribution Margin per labor Hour (Contribution margin per unit / Direct Labor hours per unit)	$30.00	$40.00