Question

Brinkley Corporation makes three products, and is currently facing a labor shortage – only 3,000 hours are available this month. The selling price, costs, and labor requirements of the three products are as follows:

	Product A		Product B		Product C
Selling price	$	50.00	$	30.00	$	40.00
Variable cost per unit	$	35.00	$	10.00	$	30.00
Direct labor hours per unit		1.5		3		2

1. What is the contribution margin per unit for each product?

2. What is the contribution margin per direct labor hour for each product?

3. Assume Brinkley has unlimited demand for each product. Which product should Brinkley focus on producing?

4. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? (Round your answer to 2 decimal places.)

Answer 1

		Product A	Product B	Product C
	Selling price	50	30	40
	Variable cost	35	10	30
a	Contribution margin per unit	15	20	10
	Direct labor hours	1.5	3	2
b	Contribution margin per direct labor hour	10	6.666667	5
	Rank as per contribution margin per labor hours	1	2	3

c. Product A has highest contribution per labor hour unit. Since, resources are unlimited, whole of company’s time and resources shall be devoted to producing A .

d. The company should be willing to pay up to $5 per direct labor hour to obtain more of the constrained resource because this is the value to the company of using this constrained resource to make more of product C.

This is taking into account other products are already at optimal output