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80 San Fran Cycles manually manufactures three unique bicycle models: racing, touring, and basic. All of the skilled crafts people employed at San Fran can make each of the three models. Because it takes about a year to train each craftsperson, labor is a fixed production constraint over the short term. For 2013, the company expects to have available 34,000 labor hours. The average hourly labor rate is $30. Data regarding the current product line follow. Racing Touring Basic Selling price $3,600 $2,720 $960 Variable costs Direct material $ 880 $ 640 $240 Direct labor 1,500 1,050 300 Variable factory overhead 720 480 164 Variable selling 60 40 Fixed costs Factory $400,000 Selling and administrative 100,000 The company pays taxes at the rate of 50 percent of operating income. a. If an unlimited amount of any product can be sold, how many of each product should the company make? What pre-tax income will the company earn given your answer? b. How many (rounded to the nearest whole unit) of each product must the company make if it has the policy to devote no more than 50 percent of its available skilled labor capacity to any one product but at least 20 percent to every product? What pre-tax income will the company earn given your answer? c. Given the nature of the three products, is it reasonable to believe that there are market constraints on the mix of products that can be sold? Explain. d. How does the company's tax rate enter into the calculation of the optimal labor allocation? Basic a. Maximizing the contribution margin per unit of scarce resource: (Direct labor hours is the scarce resource) Racing Touring Sales per unit VC per unit CM per unit + Hours per bike CM per hour If the company can sell an unlimited amount of any of the products, how many of each product should it make? What pre-tax income will the company earn given your answer? Contribution margin Fixed costs Pretax income b. How many of each product must the company make if it has the policy to devote no more than 50 percent of its available skilled labor capacity to any one product but at least 20 percent to every product? What pre-tax income will the company earn given your answer? + Hours per Bike = Production levels: Total Labor Hrs. * Percentage Basic Racing Touring Production bikes bikes bikes Contribution margin: Production * CM per Unit Basic Racing Touring Total Less fixed costs Pretax income c. Given the nature of the three products, is it reasonable to believe that there are market constraints on the mix of products that can be sold? Explain. d. How does the company's tax rate enter into the calculation of the optimal labor allocation
