Question

Hewitt Co. has 4,000 machine hours available to produce either Product 22 or Product 44. The cost accounting department developed the following unit information for each product:

Product 22 |
Product 44 |
||||||

Sales price | $27 | $50 | |||||

Direct materials | 6 | 8 | |||||

Direct labor | 3 | 2 | |||||

Variable manufacturing overhead | 4 | 5 | |||||

Fixed manufacturing overhead | 3 | 5 | |||||

Machine time required | 20 minutes | 60 minutes |

Management wants to know which product to produce in order to
maximize the company’s income. Taking into consideration the
constraints under which the company operates, prepare a report.
**(Round machine hours required to 2 decimal places and
other answers to 0 decimal places.)**

Contribution margin per unit |
Product 22 |
Product 44 |
|||||||||

Direct LaborMachine Hours AvailableNet IncomeMachine Hours RequiredVariable OverheadSales PriceVariable CostsDirect MaterialFixed CostsContribution Margin Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available | $ | $ | |||||||||

Direct LaborContribution MarginDirect MaterialMachine Hours RequiredFixed CostsNet IncomeMachine Hours AvailableSales PriceVariable OverheadVariable Costs Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available | |||||||||||

Contribution MarginNet IncomeMachine Hours RequiredDirect LaborVariable CostsDirect MaterialSales PriceFixed CostsMachine Hours AvailableVariable Overhead Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available | $ | $ | |||||||||

Variable CostsContribution MarginVariable OverheadMachine Hours RequiredNet IncomeMachine Hours AvailableSales PriceDirect LaborDirect MaterialFixed Costs Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available | |||||||||||

Sales PriceDirect MaterialMachine Hours AvailableVariable OverheadFixed CostsNet IncomeDirect LaborMachine Hours RequiredVariable CostsContribution Margin Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available | |||||||||||

Direct MaterialNet IncomeVariable OverheadContribution MarginDirect LaborVariable CostsSales PriceMachine Hours RequiredMachine Hours AvailableFixed Costs Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available | $ | $ | |||||||||

Direct MaterialDirect LaborMachine Hours AvailableVariable CostsMachine Hours RequiredContribution MarginVariable OverheadNet IncomeSales PriceFixed Costs Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours Available: | hr | hr |

Product 22 |
Product 44 |
||||

Variable CostsDirect LaborVariable OverheadSales PriceNet IncomeContribution Margin Per Unit of Limited ResourceDirect MaterialFixed CostsMachine Hours AvailableContribution MarginMachine Hours Required Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours AvailableContribution Margin Per Unit of Limited Resource | $ | $ | |||

Variable CostsNet IncomeDirect MaterialContribution Margin Per Unit of Limited ResourceFixed CostsDirect LaborContribution MarginMachine Hours RequiredVariable OverheadSales PriceMachine Hours Available Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours AvailableContribution Margin Per Unit of Limited Resource | |||||

Machine Hours RequiredFixed CostsVariable OverheadMachine Hours AvailableContribution MarginDirect MaterialNet IncomeSales PriceContribution Margin Per Unit of Limited ResourceVariable CostsDirect Labor Sales PriceVariable CostsDirect MaterialDirect LaborVariable OverheadContribution MarginMachine Hours RequiredFixed CostsNet IncomeMachine Hours AvailableContribution Margin Per Unit of Limited Resource | $ | $ |

Which product should be produced and sold?

Product 44Product 22 Product 22Product 44 |

Answer #1

We would first calculate contribution margin per unit of each product | ||||||

Contribution margin is excess sales price earned over variable costs. | ||||||

Product 22 |
Product 44 |
|||||

Sales price | $27 | $50 | ||||

Variable costs | ||||||

Direct materials | $6 | $8 | ||||

Direct labor | $3 | $2 | ||||

Variable manufacturing overhead | $4 | $13 | $5 | $15 | ||

Contribution margin per unit |
$14 |
$35 |
||||

Machine hours required per unit | 1/3 | hrs | 1 | hrs | ||

Contribution margin per unit of limited resource ($14/(1/3)); ($35/1) | $42.00 | $35.00 | ||||

Machine hours available | 4000 | 4000 | ||||

Contribution margin | $168,000 | $140,000 | ||||

Contribution margin of product 22 is higher than product 44 and
thus company should produce Product 22. |
||||||

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1
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