Question

Peter S. John's enterprises creates and sale 3 kinds of dress shirts. Management is trying to determine the most profitable mix. Sales prices, demand, and use of manufacturing inputs follow:

	Basic			Classic			Formal
Sales price	$	38		$	66		$	185
Maximum annual demand (units)		22,000			15,000			32,000
Input requirement per unit
Direct material		0.6	yards		0.2	yards		0.5	yards
Direct labor		0.8	hours		2	hours		7	hours

Costs
Variable costs
Materials	$	22	per yard
Direct labor	$	18	per hour
Factory overhead	$	3	per direct labor-hour
Marketing		10	% of sales price
Annual fixed costs
Manufacturing	$	54,000
Marketing	$	9,500
Administration	$	48,000

The company faces two limits: (1) the volume of each type of shirt that it can sell (see maximum annual demand) and (2) 43,000 direct labor-hours per year caused by the plant layout.

d-1. Calculate the contribution margin for each type of dress shirt using the table below.

  

Basic Classic Total revenue Less variable manufacturing costs Total costs Contribution margin

b-1. Compute the contribution margin for each shirt per the constrained resource, direct labor. (Do not round intermediate calculations. Round your final answers to 3 decimal places.)

Answer 1

Solution d1:

Computation of contribution margin for each type of dress shirt
Particulars	Basic	Classic	Formal
Selling price per shirt	$38.00	$66.00	$185.00
Less: Variable cost:
Direct material	$13.20	$4.40	$11.00
Direct labor	$14.40	$36.00	$126.00
Factory overhead	$2.40	$6.00	$21.00
Marketing	$3.80	$6.60	$18.50
Total variable cost	$33.80	$53.00	$176.50
Contribution margin per unit	$4.20	$13.00	$8.50

Solution b1:

Computation of contribution margin for each shirt per the constrained resource, direct labor
Particulars	Basic	Classic	Formal
Contribution margin per unit	$4.20	$13.00	$8.50
Direct labor hour per unit	0.8	2	7
Contribution margin per direct labor hour	$5.250	$6.500	$1.214