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Exercise 6-12 (Video) Dalton Inc
Exercise 6-12 (Video)
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Product
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||||||
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D
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E
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F
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| Selling price | $190.60 | $293.60 | $246.40 | |||
| Direct labor costs | 28.60 | 84.70 | 34.10 | |||
| Other variable costs | 97.00 | 78.00 | 141.00 | |||
The company has 2,200 hours of labor available to build inventory in anticipation of the company’s peak season. Management is trying to decide which product should be produced. The direct labor hourly rate is $11.
Determine the number of direct labor hours per unit. (Round answers to 2 decimal places, e.g. 52.75.)
Determine the contribution margin per direct labor hour. (Round intermediate calculation and final answers to 2 decimal places, e.g. 52.75.)
Determine which product should be produced.
Determine the total contribution margin for that product.
Expert Solution
Part A
| Product D: | $28.60 ÷ $11 = 2.60 hours per unit | |
| Product E: | $84.70 ÷ $11 = 7.70 hours per unit | |
| Product F: | $34.10 ÷ $11 = 3.10 hours per unit |
(D: $28.60 ÷ $11 = 2.60)
(D: DL cost ÷ DL hrly. rate = DLH/unit)
(E: $84.70 ÷ $11 = 7.70)
(E: DL cost ÷ DL hrly. rate = DLH/unit)
($34.10 ÷ $11 = 3.10)]
(F: DL cost ÷ DL hrly. rate = DLH/unit)
Part B
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Product
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D
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E
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F
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| Selling price | 190.60 | $293.60 | $246.40 | |||
| Variable costs | 125.60 | 162.70 | 175.10 | |||
| Contribution margin | 65.00 | 130.90 | 71.30 | |||
| Direct labor hours per unit | ÷2.60 | ÷7.70 | ÷3.10 | |||
| Contribution margin per direct labor hour | $25.00 | $17.00 | $23.00 | |||
(D: ($190.60 - $125.60) ÷ 2.60 = $25.00)
(D: (USP – UVC) ÷ DLH/unit = CM/DLH)
(E: ($293.60 - $162.70) ÷ 7.70 = $17.00)
(E: (USP – UVC) ÷ DLH/unit = CM/DLH)
(F: ($246.40 - $175.10) ÷ 3.10 = $23.00)
(F: (USP – UVC) ÷ DLH/unit = CM/DLH)
Part C
Product D should be produced because it generates the highest contribution margin per direct labor hour.
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Product D
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| Total direct labor hours available | 2,200 | |
| Contribution margin per direct labor hour | x $25.00 | |
| Total contribution margin | $55,000 |
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