Problem: The Calibri Company produces three products: F,G and H. The selling price, variable costs, and contribution margin for one unit of each product follow:
Product
F G H
Selling price $40 $110 $50
Variable costs:
Direct materials $16 $25 $20
Direct labor $11 $20 $12
Variable manufacturing overhead $10 $10 $8
Total variable costs $37 $55 $40
Contribution margin $3 $55 $10
Contribution margin ratio 7.5% 50% 20%
One or two major machines used to produce these products has broken down and a new one is on backorder so the company is down to one machine. Product F takes 0.20 machine hours to produce one unit, Product G takes 11 machine hours to produce one unit, and Product H takes 2.5 machine hours. There are 1,000 machine hours available on the new machine.
Problem 1: What is the amount of contribution margin that will be obtained per machine hour on each product?
Problem 2: Which product would you recommend that the company work on next week - the orders for product F, product G, or product H? Show computations.