Exercise 12-5 Utilization of a Constrained Resource [LO3]

The following are the selling price, variable costs, and contribution margin for one unit of each of Banner Companys three products: A, B, and C:

	Product
	A				B				C
Selling price	$	70.00			$	130.00			$	80.00
Variable costs:
Direct materials		25.50				53.60				43.20
Direct labour		17.50				35.00				14.00
Variable manufacturing overhead		2.50				5.00				2.00
Total variable cost		45.50				93.60				59.20
Contribution margin	$	24.50			$	36.40			$	20.80
Contribution margin ratio		35	%			28	%			26	%

Due to a strike in the plant of one of its competitors, demand for the companys 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 labour rate is $7 per hour, and only 3,050 hours of labour time are available each week.

Required: 1. Compute the amount of contribution margin that will be obtained per hour of labour time spent on each product. (Round your intermediate calculations to 1 decimal place. Round your answers to 2 decimal places.)

2. Which orders would you recommend that the company work on next weekthe orders for product A, product B, or product C?

• Product C OR

• Product B OR

• Product A

3. By paying overtime wages, more than 3,050 hours of direct labour 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Contribution margin per labour hour Maximum amount per hour