Question

1. Carter Inc. produces two products, A and B. Pertinent per-unit data follow:
   

	A	B
Sales price	$268	$225
Costs:
Direct materials	80	40
Direct labor	43	80
Variable factory overhead (based on direct labor hours)	60	40
Fixed factory overhead (based on direct labor hours)	30	20
Marketing expenses (all variable)	40	31
Total costs	253	211
Operating income	$15	$14

There is insufficient labor capacity in the plant to meet the combined demand for both products. Both products are produced through the same production departments. The fixed factory overhead rate is $10 per direct labor hour. Assume that there are no avoidable fixed factory overhead costs. What is the contribution margin for each product and determine the production priority given the labor constraint. Why?

Answer 1

Contribution margin = Sales - all variable cost

	Product A	Product B
Sales	268	225
Less: variable cost
Direct Material	80	40
Direct Labor	43	80
Variable factory overhead	60	40
Marketing expense	40	31
Contribution margin	$45	$34

Fixed factory overhead = $10 per labor hour

Fixed overhead incurred per unit of A = $30 and B = $20

Labor hours used per unit of A = 30/10 = 3 hours

per unit of B = 20/10 = 2 hours

Contribution margin per labor hour :-

	A	B
Contribution margin (a)	45	34
Labor hours per unit (b)	3	2
Contribution margin per labor hour (a/b)	15	17

Production of product B should be in priority because it provides more contribution per labor hour.