Question

Wood Carving Corporation manufactures three products. Because of a recent lack of skillled wood carvers, the corporation has had a shortage of available labor hours. The following per unit data relates to the three products of the corporation: Letter Openers Elvis Statues Candle HoldersSales Price $30 $80 $42Variable Costs $20 $40 $20Labor Hours Required 1 6 2Assume that Wood Carving has 1,800 labor hours available next month. Also assume that Wood Carving can only sell 800 units of each product in a given month. What is the maximum amount of contribution margin that Wood Carving can generate next month given this labor hour shortage?A. $12,000B. $19,000C. $19,600 D. $19,800E. None of the Above

Answer 1

Answer:

C. $19,600

Explanation:

The contribution margin per hour can be obtained by dividing the difference between the price and variable costs by the number of labor hours required.

$\left[\begin{array}{cccc}\ &LO&ES&CH\\Price&30&80&42\\Cost&20&40&20\\Labor \ hours&1&6&2\\margin\ per\ hour&10&6.67&11\end{array}\right]$

Since the candle holders yield the greatest contribution per hour, the maximum of 800 units of this product should be produced. The remaining labor hours after producing candle holders is:

$LH_1 = 1,800 - 800*2 = 200$

The remaining hours should be used to produce letter openers since they provide the next best contribution per hour. 200 letter openers can be produced with the remaining hours.

The maximum contribution margin that Wood Carving can generate next month is:

$CM = 200*(\ 30-\ 20)+800*(\ 42-\ 20)\\CM=\ 19,600$