Question

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	$	370		$	215
Costs
Direct materials		75			40
Direct labor (@ $25/hr.)		100			50
Variable factory overhead*		75			50
Fixed factory overhead*		25			15
Marketing costs (all fixed)		15			10
Total costs	$	290		$	165
Operating profit	$	80		$	50

*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:

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

2b. Which of the two products should be produced?

• Flash

• Clash

Answer 1

2a. Computation of contribution margin per labor hour for both Flash and Clash:

2b. As the direct labor hours are limited, hence the product with maximum Contribution Margin per direct hour labor hour will be produced.

As the product Clash has greater Contribution Margin per direct hour labor hour than the product Clash, Hence Flash product should be produced.