In Class #12.5 – Utilization of a Constrained Resource
Punter Company produces three products: A, B and C. The selling price, variable costs, and contribution margin for one unit of each product follow:
Selling price Variable costs
Direct materials Direct labour Variable OH
Total variable cost Contribution margin Contribution margin ratio
$60
$27 12 3 $ 42 $18 30%
$90
$14 32 8 $ 54 $36 40%
$80
$40 16 4 $ 60 $20 25%
Product ABC
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 labour rate is $8 per hour, and only 3,000 hours of labour time are available each week.
Required 1:
Which orders would you recommend that the company work on next week – the orders for product A, product B or product C? Show computations.
Required 2:
If your demand for each product was 1,000 units of product A, 1,000 units of product B and 200 units of product C, how much of each product would you produce? Show computations.
Required 3:
By paying overtime wages, more than 3,000 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? Explain.