Utilization of a Constrained Resource [LO5, LO6]

Banner Company produces three products: A, B, and C. The selling price, variable costs, and contribution margin for one unit of each product follow:

Product A B C Selling price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60 $90 $80 Variable costs:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . 27 14 40 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 32 16 Variable manufacturing overhead . . . . . . . . . . . . 3 8 4 Total variable cost . . . . . . . . . . . . . . . . . . . . . . . . . . 42 54 60 Contribution margin . . . . . . . . . . . . . . . . . . . . . . . . . $18 $36 $20 Contribution margin ratio . . . . . . . . . . . . . . . . . . . . . 30% 40% 25%

Due to a strike in the plant of one of its competitors, demand for the company’s products far exceeds its capacity to produce. Management is trying to determine which product(s) to concentrate on next week in filling its backlog of orders. The direct labor rate is $8 per hour, and only 3,000 hours of labor time are available each week.
Required:
1. Compute the amount of contribution margin that will be obtained per hour of labor time spent on each product.
2. Which orders would you recommend that the company work on next week—the orders for product A, product B, or product C? Show computations.
3. By paying overtime wages, more than 3,000 hours of direct labor time can be made available next week. Up to how much should the company be willing to pay per hour in overtime wages as long as there is unfilled demand for the three products? Explain.