Assume Fender produces only three guitars: the Stratocaster, Dreadnought and Telecaster. A limitation of 720 labor hours per week prevents Fender from meeting the sales demand for these products. Product information is as follows:

Required

a. Determine the weekly contribution from each product when total labor hours are allocated to the product with the highest 1. Unit selling price.
2. Unit contribution margin.
3. Contribution per labor hour.
(Hint: Each situation is independent of the others.)

b. What generalization can be made regarding the allocation of limited resources to achieve short-run profit maximization?

c. Determine the opportunity cost the company will incur if management requires the weekly production of 20 Telecasters.

d. Give reasons why a company may not allocate resources in the most economical way in some situations.

Transcribed Image Text:

Stratocaster Dreadnought Telecaster Unit selling price... $960 $600 $1,260 Unit variable costs (600) (300) (1,080) Unit contribution margin.. $360 $300 $ 180 Labor hours per unit.. 36 24 36