Question

Gulf Breeze Corporation produces three products for water skiing enthusiasts: life vests, tow ropes, and water skis. Information relating to each product line is as follows.

	Life Vests				Tow Ropes				Water Skis
Selling price	$	58			$	25			$	175
Direct materials		12				3				75
Direct labor		20				10				80
Variable overhead		6				2				4

Gulf Breeze pays its direct labor workers an average of $10 per hour. At full capacity, 65,000 direct labor hours are available per year. The marketing department has just released the following sales estimates for the upcoming year: life vests (25,000 units), tow ropes (15,000 units), and water skis (5,000 units). Based on these figures, demand for the current year is expected to exceed the company's direct labor capacity.

a-1. Calculate the total hours required to meet demand of each products.

	Life Vests Tow Ropes Water Skis Total hours required

a-2. What products should Gulf Breeze produce to maximize its operating income?

What products should Gulf Breeze produce to maximize its operating income?

	Gulf Breeze should produce

Answer 1

A 175 Selling Price Direct Materials Direct Labour Variable Overhead Contribution Per unit Direct Labour Hours Required per unit (Direct Labour p.u./ per hour rate) Sales Estimate for Next year Total hours required (G*E) Life Vests Tow Ropes Water Skis 58 $ 25 $ 12 $ 3 $ 75 20 $ 10 $ 6 $ - 2 $ 20 $ 10 $ 2 ($20/$10) 25000 15000 5000 50000 15000 40000 E G А $ Products to produce to maximise its operation income Contribution per unit $ 20 $ Direct Labour hour per unit 2 Contribution per unit per lab hour (A/B) $ 10 $ Ranking Priority in production 10 1 10 16 8 2 C $ Units Lab Hr Less 25000 Therefore, production would be Total Labour hour available Used in production of life vests Balance Used in production of tow ropes Balance T otal Lab hr 65000 2 50000 15000 1 15000 Less 15000 Thus, Life vests should be produced 25000 units and tow ropes 15000 units to maximise the profit of the business.