Question

Hanson Corp. produces three products, and is currently facing a labor shortage – only 5,000 hours are available this month. The selling price, costs, labor requirements, and demand of the three products are as follows:
Product A Product B Product C
Selling price $ 68.00 $ 35.00 $ 52.00
Variable cost per unit $ 48.00 $ 21.00 $ 44.00
Direct labor hours per unit 1.8 2.8 1.9
Demand 1,100 1,900 2,100
a. In what order should Hanson prioritize production of the products?

A,B,C
C,B,A
B,A,C
C,A,B


b. How many of each product should be sold during the labor shortage to maximize profit? (Leave no cells blank - be certain to enter "0" wherever required. Round your answer to the nearest whole number.)



c. What is the total contribution margin if Hanson prioritizes production according to its limited resources? (Round your intermediate calculations to the nearest whole number and final answer to the nearest dollar amount.)

Answer 1

Answer:

a.

A,B,C

b.

1,100 units of Product A and 1,079 units of Product B

c.

Total Contribution Margin $37,106

Explanation:

Product                                     A             B             C

Selling price                            $68.00    $35.00   $52.00

Variable cost per unit             $48.00    $21.00    $44.00

Contribution Margin               $20.00    $14.00    $8.00

Direct labor hours per unit     1.8            2.8          1.9

Contribution per labor Hour $11.11       $5.00     $4.21        

Demand                                   1,100       1,900      2,100

Numbers of Hours Required  1,980      5,320     3,990

Production should be prioritize based on contribution margin per labour hour, because labor hours is a scarce resource and decision should be made considering the benefit on each hour.

The order Should be A,B,C

We should Sale the 1,100 unit of Product A because it has maximum per labor hour contribution and 1,079 units of Product B.

Labor Hour available for Product B and C = 5,000 - 1,980 = 3,020 hours

All of these will be used for Product B

Number of Unit to be sold = 3,020 / 2.8 = 1,079 units

Total Contribution Margin = (1,100 x 20) + (1,079 x 14) = $22,000 + $15,106 = $37,106