Gunst Company produces three video games: Android, BioMutant, and Cyclops. Cost and revenue data pertaining to each product are as follows:
|Selling price||$ 100||$ 77||$ 125|
At the present time demand for each of the company's products far exceeds its capacity to produce them. Thus management is trying to determine which of its games to concentrate on next week in filling its backlog of orders. Gunst's direct labor rate is $12 per hour and only 1,000 hours of direct labor are available each week.
Determine the maximum total contribution margin the company can make by its best use of the 1,000 available hours. (Do not round intermediate calculations.)
|Total contribution margin||_____|
Utilization of scarce resource :
In management decision making, there are times that management faces problems such as the utilization of scarce resource. This constraint is prevalent when the management is trying to determine which of their products will need to be produced in order to maximize the return per limited or scarce resource. To be able to decide, management will have to compute the contribution margin per limited resource, the product with the highest yield shall utilize the limited or scarce resource of the company.
Answer and Explanation:
|Total contribution margin||$20,500|
Since there are products that Gunst Company is currently producing, we first have to determine which of the three products yield the highest contribution margin per limited resource. The limited resource in this problem is the number of labor hours. Labor hours is only 1,000.
Step 1 is to compute for the contribution margin for each product.
Step 2 is to compute for the labor hours required to produce 1 unit of each product.
Step 3 is to compute for the contribution margin per hour
Step 4 is to compute for the contribution margin for the 1,000 labor hours
- Based on the computation, we will have to utilize our labor hours for the production of Bio-Mutant since this product yields the highest contribution margin per hour.
see detailed computation below:
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from FTCE Marketing 6-12 (057): Test Practice & Study GuideChapter 8 / Lesson 8