Question

Assume that a company makes three products—Product A, Product B, and Product C—and provides the following information with respect to those products:

Product A Product B Product C
Selling price $70 $75 $85
Variable costs per unit:
Direct materials 16 24 28
Direct labor 40 32 24
Variable overhead 2 3 3
Total variable cost 58 59 55
Contribution margin $12 $16 $30

The company incurs total fixed costs of $50,000. The maximum demand for each of its products is 600 units. It pays a direct labor wage rate of $16 per hour. The company has only 2,000 direct labor-hours available for production. Assuming the company has made optimal use of its 2,000 direct labor-hours, what is the maximum hourly rate the company should be willing to pay for additional labor-hours of capacity?

Answer 1

The maximum hourly rate the company should be willing to pay for additional labor-hours of capacity is $0.31.

Step-by-step explanation:

To determine the maximum hourly rate the company should be willing to pay for additional labor-hours of capacity, we need to calculate the contribution margin per direct labor-hour.

First, let's calculate the contribution margin per unit for each product using the given information:

Product A: $12 / (40 direct labor-hours + 58 variable overheads) = $0.20 per direct labor-hour

Product B: $16 / (32 direct labor-hours + 59 variable overheads) = $0.23 per direct labor-hour

Product C: $30 / (24 direct labor-hours + 55 variable overheads) = $0.50 per direct labor-hour

Next, we can calculate the maximum hourly rate the company should be willing to pay for additional labor-hours by finding the weighted average contribution margin per direct labor-hour:

(0.20 * 600 + 0.23 * 600 + 0.50 * 600) / (600 + 600 + 600) = $0.31 per direct labor-hour

Therefore, the maximum hourly rate the company should be willing to pay for additional labor-hours of capacity is $0.31.