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.