Question

Service Emphasis
The following analysis of selected data is for each of the two services Gates Corporation provides.

				Service A	Service B
Per-service data at 10,000 services
Sales price				$27	$23
Service costs:
Variable				7	8
Fixed				6	4
Selling and administrative expenses:
Variable				5	3
Fixed				3	1

In the Gates operation, labor capacity is the company's constraining resource. Each unit of A requires 3 hours of labor, and each unit of B requires 2 hours of labor. Assuming that all services can be sold at a normal price, prepare an analysis showing which of the two services should be provided with any unused productive capacity that Gates might have.

	Service
	A	B
Revenue	Answer	Answer
Less: Variable cost	Answer	Answer
Contribution margin	Answer	Answer
Labor hours per unit	Answer	Answer
Contribution margin per labor hour	Answer	Answer

Answer 1

Solution :

	Service A	Service B
(a) Revenue	$ 27	$ 23
(b) Less : Variable Cost (A = $ 7 + $ 5) (B = $ 8 + $ 3)	$ 12	$ 11
(c) Contribution Margin	$ 15	$ 12
(d) Labor Hour per Unit	3	2
(e) Contribution Margin per Labor Hour (c / d)	$ 5	$ 6

Contribution Margin per Labor Hour is Higher in Service B so any Unused Capacity shall be devoted to Service B.

Please vote up and write your doubts in comment section. Would be glad to help you further.